What Is Depreciation Recapture?
Depreciation Recapture is a tax rule that applies when you sell an asset—such as real estate or business equipment—for more than its adjusted cost basis. When this happens, the IRS requires you to “recapture” the depreciation deductions you claimed during ownership and report them as ordinary income. Therefore, the recaptured amount is taxed at your ordinary income rate, while any additional gain may be taxed as capital gains. For more details, refer to the IRS guide on Depreciation Recapture.
Depreciation Recapture Example
| Item | Details |
| Purchase Price | $50,000 |
| Depreciation Claimed | $20,000 |
| Adjusted Basis | $30,000 |
| Sale Price | $60,000 |
| Recaptured Depreciation | $20,000 (Taxed as ordinary income) |
| Remaining Gain | $10,000 (Taxed as capital gains) |
Steps for Calculating Depreciation Recapture
- Determine Purchase Price: First, identify the original cost of the asset.
- Subtract Depreciation: Then, deduct the depreciation you have claimed over the years.
- Calculate Adjusted Basis: As a result, you will get the adjusted cost basis.
- Compare Sale Price to Adjusted Basis: After that, any gain over the adjusted basis becomes subject to tax.
- Report Recaptured Depreciation: Finally, the depreciation portion is taxed as ordinary income.
FAQs about Depreciation Recapture
1. What is the tax rate for Depreciation Recapture?
Depreciation Recapture is taxed at your ordinary income rate. However, for real estate, a special 25% rate may apply.
2. Does Depreciation Recapture apply to all assets?
Yes, it applies to assets like real estate, machinery, and business equipment that have been depreciated.
3. How do I report Depreciation Recapture?
You report Depreciation Recapture on IRS Form 4797, used to declare the sale of business property. Refer to the IRS instructions for this form for more details.
4. How does Depreciation Recapture affect real estate sales?
When selling real estate, Depreciation Recapture is taxed at 25% on the recaptured depreciation, while any remaining gain is taxed as capital gains.
5. Can Depreciation Recapture be deferred?
Yes, you can defer Depreciation Recapture through a 1031 exchange by reinvesting the sale proceeds into a similar property.
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