In the profitable real estate markets of New Hanover, Pender, Onslow, and Brunswick counties, building equity is the goal. However, many investors in Wilmington or Surf City are blindsided upon sale by a tax liability often called the "exit tax." While your focus may be on capital gains, the IRS has a specific mechanism to "claw back" the tax breaks you took during ownership: Depreciation Recapture.

Understanding how this works is vital for anyone divesting from a long-term rental in Hampstead or a vacation property in Oak Island, as it can significantly impact your net proceeds at the closing table.

The IRS "Claw Back" Mechanism

During the years you owned your rental property in Southeastern NC, the IRS allowed you to write off the value of the building (not the land) as a depreciation expense. This non-cash deduction reduced your taxable income, effectively "saving" you money every year.

However, depreciation is not a permanent gift. When you sell the property for a profit, the IRS considers that "saved" tax as income that must now be repaid. This is Section 1250 Depreciation Recapture.

• The Rate: While long-term capital gains are typically taxed at 15% or 20%, depreciation recapture is taxed at a much higher flat rate—up to 25%.
• The Calculation: The IRS looks at the total amount of depreciation you could have taken (even if you didn't actually claim it) and applies the recapture tax to that portion of your gain.

North Carolina’s Specific "Exit" Requirements

Beyond the federal recapture, North Carolina has its own rules for sellers. If you are a non-resident selling a property in Jacksonville or Leland, you may face an immediate withholding at closing.

• Non-Resident Withholding: Under N.C. Gen. Stat. § 105-163.3A, if a seller is not a resident of North Carolina, the buyer (via the closing attorney) is often required to withhold 4% of the sale price (or the total net proceeds) to ensure the state gets its share of the income tax due on the gain and recapture.
• State Income Tax: North Carolina treats the gain from a real estate sale as ordinary income. For 2025, this is taxed at a flat rate of approximately 4.25%. When combined with the federal 25% recapture and standard capital gains, your "exit" can be more expensive than anticipated.

Strategic Advice to Mitigate the Hit

For investors in Wrightsville Beach or Topsail, there are three primary strategies to manage or defer this tax:

• The 1031 Exchange: This remains the most powerful tool in the investor's arsenal. By reinvesting your proceeds into a "like-kind" property, you defer both the capital gains tax and the depreciation recapture tax indefinitely.
• The "Step-Up" in Basis: If you hold the property until death, your heirs receive a "stepped-up" basis to the current market value. This effectively wipes out all previous depreciation recapture and capital gains liability.
• Passive Loss Offsets: If you have "suspended passive losses" from your rental activities in Brunswick County, you can use those accumulated losses to offset the gain and recapture tax in the year of the sale.

Your Next Step

Planning your exit strategy is just as important as your acquisition strategy. At Aspyre Realty Group, we are experts in listening and communicating people's wants into homes that work for them. We act as your strategic partner and guide, helping you analyze the tax implications of your sale across New Hanover, Pender, Onslow, and Brunswick counties so that you can move toward your next investment with confidence and clarity.