Not tax free
Your basis is zero, so almost the whole sale price is gain.
The short answer
The rate depends on the asset
Equipment comes back as ordinary income at up to 37 percent. Hold a building more than a year and the depreciation gain is capped at 25 percent.
Above cost is Section 1231
Recapture stops at the depreciation allowed or allowable, claimed or not. Anything above your original cost is Section 1231 gain.
Have us classify the assets before you sell
Send us the depreciation schedule and the bill of sale and we will tell you which section each asset falls under and what the sale costs. Call (212) 641-0673 or use the contact form. We come back within 24 hours, and we are available evenings and weekends. Confidential, and handled by a CPA or EA.
Basis vs rate
Basis is zero. The rate is what people get wrong
A fully depreciated asset has no adjusted basis left. A fully depreciated asset usually still has a market value, and that gap is what gets taxed. Sell the machine for $12,000 when its basis is zero and the gain is $12,000, all of it.
What people get wrong is not the size of the gain. It is the rate. The tax on that gain depends on what kind of asset you depreciated, and the difference between the two answers is large enough to change whether the sale was worth making.
01Zero basis
What a zero adjusted basis means at sale
A zero adjusted basis means you have claimed the full cost as depreciation, either over the recovery period or all at once under Section 179 or bonus depreciation. There is nothing left to write off.
The example below follows a delivery van bought for $50,000 in 2022, written off in full that year, and sold for $60,000 in 2026.
Gain on a fully depreciated van sold above cost
| Amount | |
|---|---|
| Original cost (all deducted in 2022) | $50,000 |
| Adjusted basis (nothing left to write off) | $0 |
| Sold March 2026 | $60,000 |
| Gain — the whole sale price | $60,000 |
$50,000 Section 1245, ordinary rates
$10,000 Section 1231
Recapture stops at the $50,000 of depreciation. Anything above original cost is Section 1231 gain. Illustrative, your own figures will differ.
The tax calculation uses basis, not book value in your accounts and not what the asset is worth. Zero basis means the entire sale price is gain, before you get to the question of what rate applies to it. Publication 551 sets out how basis is adjusted.
Your depreciation figure is the depreciation allowed or allowable, not what you claimed. If you were entitled to a deduction and never took it, the calculation still assumes you did. Skipping depreciation gives the deduction away and leaves the tax in place.
021245 vs 1250
Section 1245 against Section 1250: which rate applies
Equipment recapture is ordinary income with no ceiling. Building depreciation gain is capped at 25 percent.
| Asset type | Comes back as | Ceiling | Reported on |
|---|---|---|---|
| Equipment, vehicles, furniture, fixtures. Section 1245 property. | Ordinary income | None. Up to 37%. | Form 4797, Part III |
| Buildings and structural components. Section 1250 property. | Unrecaptured Section 1250 gain, if held more than a year | 25 percent | Form 4797, then Schedule D line 19 |
| Land | Nothing. Land is not depreciated. | Not applicable | Form 4797, Part I |
Where a building was depreciated faster than straight line, the excess comes back as ordinary income instead. That is rare after 1986 and the rate page covers it.
A sale is often a mix of classes. Sell a restaurant and the ovens, the walk in and the point of sale terminals are Section 1245, and the leasehold improvements may be Section 1250. You price and tax each one separately. There is no single rate for the sale.
A trade in counts. Hand a fully depreciated van to a dealer against a new one and that is a sale, with the trade in credit as your proceeds. Section 1031 has covered real property only since 2018, so the recapture is due in the year you swapped. Nothing about it looks like a sale.
031231 lookback
Section 1231 gain and the five year lookback
Section 1231 gain is the gain left after recapture, on business property you held more than a year.
The rule
Better of two treatments
Net gain
Taxed as long term capital gain.
Net loss
Ordinary — comes off your income, no $3,000 cap.
The catch
5 yr
lookback window
Old losses turn this year’s gain ordinary
Unused Section 1231 losses from the previous five years turn this year’s net gain into ordinary income, up to whatever is left of them. Sell equipment at a loss one year and a building at a gain three years later — the two are connected.
What to do
Pulling five years of Form 4797 before you sell is the only way to know whether an old loss turns this year’s gain into ordinary income.
04Related party rule
Sales to a related party under Section 1239
Sell depreciable property to an entity you control and the entire gain is ordinary income, not only the recapture slice. Section 1239 removes Section 1231 treatment and the 25 percent ceiling together.
Bought for $600,000, $180,000 depreciation, sold March 2026 for $850,000, a $430,000 gain
Sold to an unrelated buyer
$180,000 recapture
$250,000 Section 1231 gain
Sold to an LLC you own 100 percent of
All $430,000 is ordinary income
Section 1239 applies at more than 50 percent ownership. No Section 1231 treatment, no 25 percent ceiling. Illustrative, your own figures will differ.
The rule applies where the buyer is:
- A corporation where you own more than 50 percent of the value of the stock, directly or indirectly.
- A partnership or an LLC taxed as one where you own more than 50 percent of the capital or profits interest.
- A trust where you or your spouse is a beneficiary, unless that interest is remote and contingent.
The property has to be depreciable in the buyer's hands, so land sold on its own falls outside the rule.
Ownership counts more than you hold yourself. Attribution rules similar to Section 267(c) add interests held by your spouse, siblings, parents and children to your own. A family business can be a controlled entity even where no one person holds a majority.
The common fact pattern: an owner moves a rental building or a piece of equipment into their own LLC to tidy up the structure. The transfer is a sale, the buyer will depreciate the property, and the whole gain is taxed at ordinary rates.
05Worked example
A fully depreciated machine sold for $60,000
A machine cost $50,000. You have claimed the full $50,000 in depreciation, so your basis is zero. You sell it after four years for $60,000.
- Gain: $60,000 less zero basis, so $60,000.
- $50,000 is Section 1245 recapture, capped at the depreciation allowed or allowable. It is ordinary income at your marginal rate, up to 37 percent. No 25 percent ceiling applies.
- $10,000 is the gain above your original cost. That is Section 1231 gain, and after netting it is generally long term capital gain at 0, 15 or 20 percent.
Tax on $50,000 of recaptured depreciation, Section 1245 against Section 1250, at the top federal rate
The van, Section 1245
Ordinary income, no ceiling
$18,500
at 37 percent
A building, Section 1250
Ceiling of 25 percent
$12,500
at 25 percent — $6,000 less
Illustrative example, not tax advice. Your own figures and rates will differ.
06What people get wrong
Why equipment recapture is not capped at 25 percent
The belief
Depreciation recapture is taxed at 25 percent.
What is true
25 percent is a ceiling on unrecaptured Section 1250 gain, and Section 1250 property is real property. Sell equipment and the recapture is ordinary income with no special 25 percent ceiling on it, which at the top individual rate reaches 37 percent.
Why it costs money. On $50,000 of recapture the difference between the two answers is $6,000 of federal tax, before New York. Owners who budget the sale at 25 percent set aside too little, and they find out in April rather than at the closing when they could still have done something about it.
07New York
New York tax on Section 1245 recapture
For an individual seller, Section 1245 recapture is ordinary income federally and New York taxes it at the regular state rates. City resident tax applies only if you live in the five boroughs, and the Form IT-203 instructions set out how a nonresident allocates. A building is different, because a federal ceiling applies.
08Form 4797
Form 4797 Part I, Part II and Part III
You report a Form 4797 sale of business property in more than one place on the same form. For property held more than a year:
- Part III computes recapture under Sections 1245 and 1250, which carries to Part II as ordinary income.
- Part I takes what is left and nets it against your other Section 1231 items for the year.
- Schedule D receives any long term gain left after the netting.
09Form 8594
Form 8594 and price allocation on a business sale
A business sale allocates the price across seven asset classes, from cash at the top to goodwill at the bottom, and both sides file a Form 8594 asset acquisition statement. That applies where three conditions are met.
- The assets make up a trade or business.
- Goodwill could attach to them.
- The buyer’s basis is set by what they paid.
The allocation decides your rate, so negotiate it. The two sides want opposite things.
The example below allocates the same $1,000,000 business sale two ways and shows what the difference is worth to the seller.
Form 8594: two allocations of a $1,000,000 business sale, at the top rates
| Allocation | Equipment (ordinary) | Goodwill (capital) | Your federal tax |
|---|---|---|---|
| Allocation A, the buyer’s preference | $400,000 | $600,000 | $268,000 |
| Allocation B, your preference | $150,000 | $850,000 | $225,500 |
| Worth to you | $42,500 |
Both sides file Form 8594 with matching figures. Illustrative, your own figures will differ.
- Weight it toward equipment and you take more ordinary recapture while the buyer gets a faster deduction.
- Weight it toward goodwill and you generally take Section 1231 or capital gain while they amortize over fifteen years.
Any Section 197 amortization you claimed earlier can be recaptured too. Those interests are directly opposed, and the two sides usually negotiate the allocation after the price is agreed.
10FAQ
Fully depreciated asset sale questions
What happens if I sell a fully depreciated asset at a loss?
No recapture applies, because recapture reaches gain only. With basis at zero, a loss arises only where your selling costs exceed the proceeds. Hold the property more than a year and that loss is a Section 1231 loss. It comes off your ordinary income, with no $3,000 cap.
Do I owe tax if I sell for less than I originally paid?
Usually yes. Basis decides the gain, not original cost. A machine that cost $50,000 and is fully depreciated has a basis of zero, so a $12,000 sale produces $12,000 of gain.
Does a trade in avoid depreciation recapture?
No. A trade in is a sale, and the trade in credit is your proceeds. Section 1031 has covered real property only since 2018, so recapture on equipment is due in the year of the swap.
Does it matter whether I claimed the depreciation?
No. The calculation uses the depreciation allowed or allowable, meaning what you could have claimed. Skipping the deduction gives the deduction away and leaves the tax in place.
Does selling to my own LLC change the tax?
Yes, and it costs more. Under Section 1239, a sale to an entity you control makes the whole gain ordinary income, not only the recapture slice.
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After-tax number, before you agree
Get the after tax number on the sale
Asset by asset, with the ordinary and the capital pieces separated and New York added. Before you agree the price, not after. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising business owners on asset sales, basis and depreciation. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.