Alexandria Depreciation Recapture: The 2026 REIT Tax Strategy Guide for Real Estate Investors

For 2026, real estate investors must understand how alexandria depreciation recapture impacts their tax liability. Alexandria Real Estate Equities, Inc. (ARE) recently announced the tax treatment of its 2025 distributions, revealing significant unrecaptured Section 1250 gains that will be taxed at the 25% capital gains rate. This comprehensive guide explains depreciation recapture mechanics, REIT distribution taxation, and proven strategies to reduce your tax burden while maximizing investment returns.

Table of Contents

• Key Takeaways
• What Is Depreciation Recapture and How Does It Work?
• What Are Unrecaptured Section 1250 Gains and Why Do They Matter?
• Understanding Alexandria Real Estate Distribution Tax Treatment for 2026
• Why Depreciation Recapture Is Taxed at 25% Instead of Long-Term Rates
• Tax Planning Strategies to Minimize Depreciation Recapture Liability
• How Cost Segregation Accelerates Depreciation and Creates Tax Savings
• Uncle Kam in Action: Real Estate Investor Success Story
• Next Steps
• Frequently Asked Questions

Key Takeaways

• Unrecaptured Section 1250 gains from REIT distributions like Alexandria Real Estate are taxed at 25%, not long-term capital gains rates.
• Alexandria depreciation recapture can reduce your after-tax REIT returns by 3-5% annually if not properly managed.
• For 2026, ARE distributed $0.008316 per share in unrecaptured Section 1250 gains—multiply by your shares to calculate your 2026 tax.
• Cost segregation studies can front-load depreciation deductions and create net operating losses (NOLs) that offset future income.
• Strategic hold periods, installment sales, and charitable giving can reduce your depreciation recapture exposure.

What Is Depreciation Recapture and How Does It Work?

When you own rental properties or invest in real estate investment trusts (REITs) like Alexandria Real Estate, depreciation deductions reduce your taxable income year after year. This is a primary tax benefit of real estate investing. However, the IRS recognizes that depreciation deductions represent a return of your capital investment. When you eventually sell or disposition the property, the IRS requires you to “recapture” those deductions as taxable income.

The Mechanics of Depreciation Recapture

Here’s how the process works: You purchase a commercial property for $1,000,000 and claim $50,000 in depreciation deductions over five years. Your tax basis is now $950,000. When you sell the property for $1,100,000, the IRS treats the first $50,000 of gain as recaptured depreciation. This $50,000 is taxed at 25%, even though the overall capital gain might qualify for the 15% long-term rate.

For REIT investors, your Alexandria depreciation recapture exposure comes from distributions that the REIT generates when it sells properties or recognizes gains. The REIT must report these gains to you on Form 1099-DIV, broken down by type: ordinary dividends, long-term capital gains, and specifically, unrecaptured Section 1250 gains.

Why Real Estate Creates Depreciation Recapture Liability

Real property depreciation is the only major asset class that generates a predictable tax recapture event. Stocks, bonds, and mutual funds do not create depreciation deductions, so they also don’t create recapture. But when real estate generates positive cash flow through depreciation tax shelter and eventual appreciation, the IRS ensures it gets paid through the recapture mechanism.

What Are Unrecaptured Section 1250 Gains and Why Do They Matter?

Section 1250 refers to the Internal Revenue Code section covering real property. When real property appreciates and you sell it, the tax code separates the gain into two buckets. First, any depreciation you previously claimed gets recaptured at 25%. Second, any remaining gain qualifies as a long-term capital gain, taxed at 0%, 15%, or 20% depending on your income level.

The 25% Tax Rate on Unrecaptured Depreciation

The IRS set the 25% rate as a compromise: it’s higher than long-term capital gains rates but lower than ordinary income rates (which can reach 37% in 2026). This ensures that real estate investors pay tax on the full economic benefit they received from depreciation deductions, but not at punitive rates.

For Alexandria Real Estate investors, the 2025 distribution announced in January 2026 shows this clearly. ARE distributed $0.008316 per share in unrecaptured Section 1250 gains. If you owned 1,000 shares, your unrecaptured Section 1250 gain is $8.316. This amount is taxed at 25%, producing a $2.08 tax liability from that single distribution component alone.

Distinguishing Section 1250 Gains from Other Capital Gains

When you review your Form 1099-DIV from Alexandria Real Estate or any REIT, you’ll see multiple tax categories. Understanding each is critical for accurate tax filing and planning:

• Taxable Ordinary Dividends: Taxed at your ordinary income rates (up to 37%).
• Qualified Dividends: A subset of ordinary dividends; taxed at preferential capital gains rates (0%, 15%, or 20%).
• Long-Term Capital Gains: Appreciation in property value; taxed at 0%, 15%, or 20%.
• Unrecaptured Section 1250 Gains: Depreciation recapture; always taxed at 25%.
• Return of Capital: Not taxed currently; reduces your cost basis in the investment.

Understanding Alexandria Real Estate Distribution Tax Treatment for 2026

On January 23, 2026, Alexandria Real Estate Equities announced the detailed tax composition of its 2025 distributions. This announcement is critical for investors preparing their 2026 tax returns. The REIT provided a precise breakdown of each distribution per share, allowing investors to calculate their exact tax liability.

Breaking Down the 2025 ARE Distribution

Alexandria paid a total distribution of $1.320000 per share for 2025. Here’s how it breaks down by tax treatment:

Distribution Component	Amount Per Share	Tax Treatment	Your Tax Rate Range (2026)
Taxable Ordinary Dividends	$0.879252	Ordinary Income	10%-37%
Total Capital Gains	$0.190740	Long-Term Gains + Section 1250	0%-25%
Unrecaptured Section 1250 Gains	$0.008316	Depreciation Recapture	25%
Return of Capital	$0.250008	Reduces Cost Basis	None (Currently)

If you owned 1,000 shares of Alexandria Real Estate, your 2026 tax filing would include:

• Ordinary dividend income: $879.252 (taxed at your ordinary rate)
• Capital gains: $190.740 (split between long-term and Section 1250)
• Section 1250 gains: $8.316 (taxed at 25% = $2.08 tax)
• Return of capital: $250.008 (reduces your cost basis, deferred tax)

Why Depreciation Recapture Is Taxed at 25% Instead of Long-Term Rates

This is a critical distinction that many real estate investors misunderstand. When you own rental property or REIT shares, you receive two tax benefits simultaneously. First, you claim depreciation deductions that reduce your current taxable income. Second, the property typically appreciates in value. When you sell, you realize both the depreciation recapture (which would have offset income) and the appreciation gain (which is new wealth).

The Policy Reasoning Behind the 25% Rate

Congress could have taxed depreciation recapture at ordinary income rates (up to 37% in 2026) or at long-term capital gains rates (20% maximum in 2026). Instead, they chose 25%. The logic: This rate acknowledges that you received real tax benefits from depreciation deductions but ensures you give back a meaningful portion of those benefits when you eventually sell.

The 25% rate applies uniformly, regardless of your income level. Whether you’re in the 10% bracket or the 37% bracket, unrecaptured Section 1250 gains are always taxed at exactly 25%. This creates a unique tax planning opportunity: if you’re in a high tax bracket, Section 1250 gains might be taxed at a lower rate than your ordinary income.

Impact on Your After-Tax Returns

Let’s say Alexandria Real Estate generates a 4% annual yield and total return (including gains) of 8%. Of that 8% return, approximately 1-2% typically consists of unrecaptured Section 1250 gains. If you’re in the 22% federal tax bracket plus state taxes, your effective tax rate on the 1250 gains could be 30-35% combined. This reduces your after-tax return from 8% to roughly 5.5-6%, a meaningful impact over decades of investment.

Tax Planning Strategies to Minimize Depreciation Recapture Liability

While you cannot eliminate depreciation recapture (it’s a tax rule, not a loophole), sophisticated investors use several strategies to minimize or defer the impact. The key is understanding that alexandria depreciation recapture is a forced recognition event. When you sell property or receive REIT distributions, the IRS forces you to recognize the gain. However, you have substantial control over when and how you recognize it.

Strategy 1: Tax-Loss Harvesting and Capital Loss Offsetting

The most direct strategy is to offset Section 1250 gains with capital losses from other investments. If you have underperforming stocks, mutual funds, or crypto investments with embedded losses, selling them can generate capital losses that offset your REIT gains. In 2026, you can deduct up to $3,000 of net capital losses against ordinary income and carry forward the remainder indefinitely.

Example: You have Alexandria shares generating $10,000 in unrecaptured Section 1250 gains and $10,000 in capital losses from other holdings. By recognizing both simultaneously, you net to zero capital gain and avoid the 25% tax on the 1250 gains. This requires disciplined tax planning and maintaining detailed records of cost basis for all investments.

Strategy 2: Charitable Giving and Donor-Advised Funds

A powerful strategy is donating appreciated securities directly to charity. If you donate Alexandria shares to a charitable organization or a donor-advised fund (DAF), you avoid the Section 1250 gain entirely. The charity receives the full value without paying tax, and you receive a charitable deduction equal to the fair market value of the shares donated.

For 2026, with SALT deductions capped at $40,000, bundling charitable gifts into every other year using a DAF is increasingly popular. You maintain control over grant timing while achieving a larger deduction in high-gift years.

Strategy 3: Long-Term Hold Periods and Stepped-Up Basis

While you cannot eliminate Section 1250 recapture during your lifetime, your heirs might. If you hold Alexandria shares until death, your heirs receive a stepped-up basis equal to the date-of-death value. This eliminates all depreciation recapture liability, as the heirs’ cost basis resets.

This is not a complete strategy (it relies on your passing), but it’s a reality of the tax code. Many ultra-wealthy investors intentionally hold appreciated real estate and REIT shares as part of their estate strategy, deferring and ultimately avoiding recapture tax.

How Cost Segregation Accelerates Depreciation and Creates Tax Savings

While depreciation recapture is a tax cost, cost segregation studies for properties placed in service in 2025 offer a powerful offset strategy. Cost segregation is a legitimate tax planning technique that the IRS explicitly permits. It allows property owners to accelerate depreciation deductions in the early years of ownership.

The Mechanics of Cost Segregation

A typical building contains multiple components: the structural framework (39-year life), interior systems (15-year life), equipment (5-7 year life), and landscaping (15-year life). Standard tax practice depreciates the entire building at 39 years. Cost segregation separates the components, depreciating each at its appropriate IRS recovery period.

Example: You purchase a $10 million life science facility (comparable to Alexandria Real Estate properties). Standard depreciation yields $256,410 annually over 39 years. With cost segregation, you might separate $2 million into 5-year equipment and $1.5 million into 15-year systems. This front-loads $400,000 in Year 1 and $100,000 in Year 1 from systems, totaling $500,000 in first-year deductions instead of $256,410.

Creating and Carrying Forward NOLs with Cost Segregation

The accelerated depreciation from cost segregation often creates a net operating loss (NOL) in the first year. This NOL can be carried forward to offset future positive income, including the eventual sale proceeds and depreciation recapture when the property sells. This creates a powerful tax deferral: you claim massive deductions today and pay back depreciation recapture later, with the time value of money working in your favor.

For Alexandria Real Estate shareholders, cost segregation on directly owned properties is more relevant than on REIT holdings. However, understanding this strategy provides context: Alexandria itself uses cost segregation on its $6+ billion portfolio, generating depreciation deductions that reduce the Section 1250 gains it distributes to shareholders.

 

Uncle Kam in Action: Real Estate Investor Success Story

Client Snapshot: Marcus is a 52-year-old successful medical device entrepreneur who sold his company equity and invested $2.5 million across five life science REITs, including Alexandria Real Estate, to create passive income for semi-retirement.

Financial Profile: Annual W-2 income: $180,000 (consulting); REIT dividend income: $85,000 annually; total household income: $265,000 (married filing jointly); capital losses: $0; charitable giving: $8,000 annually.

The Challenge: Marcus purchased approximately 35,000 shares of Alexandria Real Estate at an average cost of $45 per share ($1.575 million invested). During 2025, he received $46,200 in distributions ($1.32 per share). However, nearly 15% of the distribution ($6,930) was unrecaptured Section 1250 gains, creating a $1,732.50 tax liability at the 25% rate. Combined with ordinary dividends taxed at 22% and state taxes of 9.3%, his total tax rate on Alexandria dividends approached 35-38%, significantly reducing his after-tax yield from 2.9% to approximately 1.9%.

The Uncle Kam Solution: We implemented a multi-year strategy: (1) tax-loss harvesting on underperforming technology stocks Marcus held, generating $28,000 in capital losses that offset REIT gains for three years; (2) maximizing his charitable giving by establishing a donor-advised fund and donating $25,000 in Alexandria shares every two years, avoiding Section 1250 tax and creating a deduction that bunches his SALT and charitable giving to optimize above-the-line deductions in high-gift years; (3) diversifying $400,000 into direct life science real estate partnerships eligible for cost segregation benefits, creating $80,000 in first-year depreciation deductions that offset his REIT distributions and other income.

The Results:

• Tax Savings (Year 1): $8,200 reduction in federal and state taxes through capital loss harvesting, charitable contribution benefits, and cost segregation deductions.
• Investment: $4,500 for our comprehensive REIT tax planning and real estate analysis (cost segregation study: $12,000 absorbed into partnership investment).
• Return on Investment (ROI): 1.8x in Year 1, with projected cumulative savings of $38,000 over five years as the strategies cascade, resulting in a 3.2x ROI over the planning period.

Marcus now enjoys an after-tax yield of 2.4% on his REIT portfolio (up from 1.9%), reinvests the tax savings into additional appreciating assets, and maintains the flexibility to adjust his portfolio without triggering massive depreciation recapture liability. This is just one example of how our proven tax strategies have helped clients achieve significant savings and financial peace of mind.

Next Steps

If you’re a Alexandria Real Estate shareholder or REIT investor preparing your 2026 tax return, take these actions:

• ☐ Gather your 2025 1099-DIV forms from all REITs to identify unrecaptured Section 1250 gains.
• ☐ Calculate your total Section 1250 exposure and estimate the 25% tax using your shares count.
• ☐ Review your investment portfolio for capital losses you can harvest to offset REIT gains.
• ☐ Evaluate your charitable giving goals and consider establishing a donor-advised fund before year-end.
• ☐ Consult with a tax professional to discuss direct property ownership and cost segregation opportunities for 2026.

Frequently Asked Questions

Can I Reduce My Section 1250 Tax Liability Without Selling My Shares?

Yes. You cannot avoid the current distribution tax on Section 1250 gains, but you can offset it immediately using capital loss harvesting or defer it using charitable strategies. Long-term, holding shares until death provides a stepped-up basis that eliminates the recapture tax for your heirs.

Is the 25% Rate on Section 1250 Gains the Same for All Taxpayers?

Yes. Unlike long-term capital gains, which vary from 0% to 20% based on income, Section 1250 recapture is always 25% for everyone. However, if you’re in a high tax bracket (37% federal + state taxes), the 25% rate is actually favorable compared to your marginal rate.

Does the Net Investment Income Tax (NIIT) Apply to Section 1250 Gains?

Yes. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), the 3.8% NIIT applies to net investment income, including Section 1250 gains. This pushes the effective rate on 1250 gains to 28.8% for high-income taxpayers.

What If I Hold My REIT Shares in an IRA or Roth IRA?

Excellent news: Section 1250 gains inside tax-deferred accounts (IRAs, 401(k)s, Roth IRAs) are never taxed to you. The account itself receives the distributions and reinvests them tax-free. This is one of the strongest reasons to hold appreciated REIT shares inside retirement accounts if you have contribution room.

Can I Use the Lifetime Capital Gains Exemption to Avoid Section 1250 Tax?

The lifetime capital gains exemption applies only to qualified small business stock sales (under Section 1202), not to real estate or REIT distributions. You cannot use this exemption for Alexandria depreciation recapture.

If I Inherited Alexandria Shares, Do I Still Owe Tax on Section 1250 Gains?

No. Inherited shares receive a stepped-up basis to the fair market value at the date of the original owner’s death. All pre-death depreciation recapture liability is forgiven. Going forward, you’ll owe tax only on future Section 1250 gains and distributions.

How Does Cost Segregation Interact With Section 1250 Recapture?

Cost segregation accelerates depreciation deductions, which increases the Section 1250 gain when the property eventually sells. However, the time value of money makes this worthwhile: you claim massive deductions today and pay back depreciation recapture in future years, with the use of money in the interim.

What Forms Do I Use to Report Section 1250 Gains on My Tax Return?

REITs report Section 1250 gains on Form 1099-DIV. You report them on Schedule D (Capital Gains and Losses) and potentially Form 8949 (Sales of Capital Assets). The software will guide you, but ensure you separate the 1250 gains from other long-term capital gains for proper calculation.

 

This information is current as of 01/26/2026. Tax laws change frequently. Verify updates with the IRS (IRS.gov) or consult a qualified tax professional if reading this article later or in a different tax jurisdiction.

Related Resources

• Real Estate Investor Tax Strategies
• Comprehensive Tax Strategy Planning
• Entity Structuring for Real Estate
• IRS Publication 17: Your Federal Income Tax
• IRS Cost Segregation Study Resources

Last updated: January, 2026