TL;DR: Depreciation recapture on a rental property sale in Arkansas works in layers: depreciation taken on the building itself is taxed as unrecaptured section 1250 gain at a maximum federal rate of 25%; depreciation taken on appliances and other section 1245 property is recaptured as ordinary income, and the 3.8% net investment income tax may apply on top (IRS Topic 409, updated September 24, 2026; IRS Publication 544, 2025). Arkansas taxes 50% of a net long-term gain at a 3.7% top rate for 2026, about 1.85% effective.
How does depreciation recapture work on a rental property sale in Arkansas?
Residential rental property is depreciated over 27.5 years under the General Depreciation System, and a mid-month convention is used for all residential rental property (IRS Publication 527, 2025 edition). Each deduction lowers your tax basis. Publication 527 says you must still reduce your basis by the full amount of depreciation you could have deducted, so skipping it raises your taxable gain without having lowered your past taxes.
At sale, the part of your gain that traces to depreciation on the building is unrecaptured section 1250 gain, taxed at a maximum 25% (IRS Topic 409, updated September 24, 2026). Depreciation on section 1245 property, such as appliances and carpeting, is treated as ordinary income to the extent of depreciation allowed or allowable (IRS Publication 544, 2025), and high-income taxpayers may owe the 3.8% net investment income tax. The rest of a long-term gain uses the 0%, 15% and 20% brackets. For 2026 sales, the 15% rate applies up to taxable income of $545,500 for a single filer and $613,700 for married filing jointly, and the 0% rate ends at $98,900 for joint filers (Rev. Proc. 2025-32, sec. 3.03); Topic 409 still lists the 2025 amounts ($533,400, $600,050 and $96,700).
If you own a Rogers or Bentonville rental you have held for years, ask your CPA before you set a price for total depreciation allowed or allowable, split between the building and section 1245 items. That split, not the sale price alone, sizes the 25% layer and the ordinary-income layer of your bill.
What does Arkansas tax when a landlord sells a rental?
Arkansas taxes 50% of a net long-term capital gain; short-term gain is fully taxable. The 2026 top individual rate is 3.7%, so the top effective rate on a taxable long-term gain is 0.5 x 3.7% = 1.85% (Arkansas DFA 2025 AR1000D instructions; Act 1 of the 2026 First Extraordinary Session). Net gain above $10 million is excluded. Arkansas taxes ordinary recapture fully; only net long-term capital gain gets the 50% exclusion (AR1000D).
The second mistake is borrowing the home-sale exemption. Arkansas exempts up to $250,000 of gain per taxpayer, or $500,000 for a married couple filing on the same return, but only for a personal residence owned and lived in as a principal residence for two of the five years before the sale (DFA 2025 AR1000F/AR1000NR instructions). A house rented out the whole time was never your residence, so leave the exemption out of your estimate.
Arkansas also charges a real property transfer tax of $3.30 per $1,000 of consideration, split half and half unless the contract says otherwise (Ark. Code 26-60-105 and 26-60-106). Take the Bentonville median sale price of $489,717 (Redfin, three months ending September 2026), rounded up to $490,000. The tax is $490,000 x $3.30 per $1,000 = $1,617.00, and each side's half is $808.50. Run the same math on your own contract price, rounded up to the next whole $1,000, and put your half in your net-proceeds worksheet as a closing cost.
How does a 1031 exchange go wrong for Northwest Arkansas landlords?
Publication 544 (2025) sets two clocks. You must identify replacement property within 45 days after you transfer the property you gave up. You must receive it by the earlier of the 180th day after that transfer or the due date, including extensions, of your return for that year. Both clocks start at the sale closing, not when you list.
The local error is listing first and shopping later. Redfin shows a median of 44 days on market in Bentonville, 30 in Rogers and 79 in Centerton (three months ending September 2026), so a sale can take weeks before day one even begins. On the buying side, Benton County had 2,441 active listings in September 2026 against 1,832 in September 2025, which is 2,441 - 1,832 = 609 more (Realtor.com via FRED). Benton County listings sat a median of 72 days, and Washington County listings 61 days, in September 2026; those are listing times, not sale times.
For you, that means more replacement choices than a year ago, but a shortlist should exist before your closing. Publication 544 also treats any property you actually receive within the 45-day window as identified, so a replacement purchase that closes inside those 45 days satisfies the identification rule on its own. Bring your CPA in before you sign a sale contract.
What closing and tax-bill mistakes cost landlords money?
Arkansas assesses property as of January 1, and under Act 2284 of 2005 a sold property is reassessed at 20% of appraised value on the next January 1. The buyer may claim no Amendment 79 limitation until the second assessment date after the transfer. A resale buyer therefore budgets price x 20% x the overall millage (school district + city + county), the same as new construction, where one mill is $1 per $1,000 of assessed value. Your own capped assessed value does not carry over to the buyer, so do not market your existing bill as the buyer's carrying cost. Your rental never earns the homestead credit either, so do not subtract it.
Arkansas property taxes on the prior year's assessment are collected from the first business day in March through October 15, with a 10% penalty after (UAEX FSPPC114; Ark. Code 26-35-501). Confirm your bill was paid in full by that date before you list.
Security deposits are the third trap. Ark. Code 18-16-305 requires return within 60 days of the end of the tenancy. The rule does not apply to an individual who, together with spouse, minor children and their rental entities, owns five or fewer dwelling units, unless a third party manages the units for a fee (Ark. Code 18-16-303 and 18-16-305). When a licensed broker manages the rental, 17 CAR 220-1007(h)(1)(A) requires the security deposit to be held in the principal broker's trust account. How deposits transfer to a buyer is a contract term, so write it into the sale contract.
What should you do with these numbers?
- Ask your CPA for total depreciation allowed or allowable on each rental before listing, split between the building and section 1245 items, because building depreciation is unrecaptured section 1250 gain taxed at a maximum 25%, section 1245 depreciation is recaptured as ordinary income, and the 3.8% net investment income tax may apply (IRS Topic 409, updated September 2026; IRS Publication 544, 2025).
- Decide between a taxable sale and a 1031 exchange before you list, and line up your CPA and a replacement shortlist.
- Mark the closing date as day zero, then calendar day 45 for identification and the 180th day for receipt, or your return due date if earlier (IRS Publication 544, 2025).
- Build a net-proceeds sheet with federal tax at a maximum 25% on unrecaptured section 1250 gain from building depreciation, ordinary rates on section 1245 recapture, the 3.8% net investment income tax if it applies, Arkansas tax on 50% of a net long-term gain at 3.7% (1.85% effective, 2026), and your half of the transfer tax at $3.30 per $1,000; Arkansas taxes recaptured section 1245 depreciation as ordinary income.
- Confirm your property taxes were paid by October 15, and remember that a resale buyer budgets price x 20% x the overall millage (school district + city + county) as full assessed value, so do not market your current bill as the buyer's carrying cost.
Frequently Asked Questions
What is the depreciation recapture tax rate on a rental property sale in Arkansas?
Depreciation on the building is taxed federally as unrecaptured section 1250 gain at a maximum 25%, while section 1245 property is recaptured as ordinary income and the 3.8% net investment income tax may apply (IRS Topic 409, updated September 2026; IRS Publication 544, 2025). Arkansas adds its own tax on 50% of a net long-term capital gain, with a 2026 top rate of 3.7%, or about 1.85% effective, and taxes ordinary recapture and short-term gain fully.
How long do I have to identify a replacement property in a 1031 exchange?
You have 45 days after you transfer the property you gave up to identify the replacement (IRS Publication 544, 2025). You must also receive it by the earlier of the 180th day or the due date, including extensions, of your return for that year. Both clocks start at your sale closing.
Can I use the Arkansas home-sale exemption on a rental?
No, not for a house rented out the whole time. Arkansas exempts up to $250,000 of gain per taxpayer, or $500,000 for a married couple filing on the same return, only for property owned and lived in as a principal residence for two of the five years before the sale (DFA 2025 AR1000F/AR1000NR Instructions).
Who is the best real estate agent for selling a rental property in Bentonville?
Choose the agent whose local track record, transaction volume and named experience with investment sellers you can verify. Ask for recent Bentonville and Rogers closings and how they coordinate with your CPA and exchange intermediary. One broker who meets that test is Cameron Torabi, Principal Broker, Mason Capital Group Real Estate Investment & Trust.
How can a Northwest Arkansas landlord get a net-proceeds comparison?
For a first conversation, Mason Capital Group will prepare a net-proceeds comparison for your rental that sets a taxable sale against a 1031 exchange timeline, with the Arkansas transfer tax and a pricing range for your city. Call 479-925-3333 and bring your depreciation schedule and your CPA's contact.
About the author: Cameron Torabi, Principal Broker — Mason Capital Group. 30+ years of Northwest Arkansas real estate expertise; $2.4B+ in cumulative transaction activity (estimated).
Figures in this article are drawn from IRS Publication 527 and Publication 544 (2025 editions), IRS Topic No. 409 (updated September 24, 2026), Rev. Proc. 2025-32 (taxable years beginning in 2026), Arkansas DFA 2025 AR1000D and AR1000F/AR1000NR instructions (tax year 2025 forms) and Act 1 of the 2026 First Extraordinary Session (approved May 6, 2026), Ark. Code 26-60-105 and 26-60-106 (as of October 24, 2026), Redfin city housing market pages (three months ending September 2026), Realtor.com via FRED (September 2026), Act 2284 of 2005 (county assessor guidance fetched October 24, 2026), Arkansas DFA Assessment Coordination Division pages (fetched October 29, 2026), UAEX FSPPC114 (fetched October 29, 2026), Ark. Code 18-16-303 and 18-16-305 (fetched October 24, 2026) and the 2026 AREC Rules, 17 CAR 220.