What is Depreciation recapture?
In short
Depreciation recapture treats part of the gain on selling depreciated business property as ordinary income rather than capital gain, to reverse the benefit of earlier depreciation deductions.
Key takeaways
- For Section 1245 property (equipment), gain is ordinary up to all depreciation taken.
- For individuals' real property, gain from straight-line depreciation is unrecaptured Section 1250 gain, taxed at up to 25%.
- Recapture is recognized in full in the year of sale, even in an installment sale.
Example
Equipment cost $80,000, depreciation $50,000, sold for $70,000: the $40,000 gain is all ordinary income.
Where it's tested
REG: Property Transactions: Gains, Losses & Like-Kind Exchanges — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A business sells equipment for $55,000. Original cost was $50,000 and accumulated depreciation was $30,000. How is the gain characterized?