Depreciation Recapture

A procedure the IRS uses to maximize tax revenue from depreciating assets by requiring the profit on the sale of a depreciating asset to be reported as ordinary income rather than capital gain. Because capital gains are taxed at a lower rate than most ordinary income, the IRS uses depreciating recapture to make up for some of the tax revenue lost in the depreciating asset. Depreciation recapture is assessed if the assets are sold for a price higher than their depreciated value.

recapture of depreciation

The extent to which the price received from selling a depreciated asset represents recovery of depreciation taken in prior years. For example, an asset purchased for $10,000, depreciated to a book value of $6,000, and sold for $9,000 would result in a recapture of $3,000. Also called depreciation recapture.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

recapture of depreciation

Same as depreciation recapture.

Recapture of Depreciation

When depreciable property is sold, gain generally is taxed as ordinary income up to the amount of depreciation claimed (for personal property) and to the extent of the excess of accelerated depreciation claimed over straight-line depreciation that would have been allowed (real property). This ordinary income treatment is referred to as recapture.

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Even after utilisation of available net operating loss carry forwards, classifying Equinix assets as real estate is expected to result in a tax liability due to the reclassification to real property of certain assets that had been depreciated and amortized as personal property and the resulting recapture of depreciation and amortisation expenses.

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(60) The portion of that gain equal to the depreciation deductions allowed to B will constitute ordinary income under the recapture of depreciation rules.

There is no reason that the gain that B recognized on the sale of that income interest, other than the recapture of depreciation element, will not receive capital gain treatment.

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If not related to the buyer, the seller of business assets is entitled to report capital gain.6 The major exceptions relate to 1) recapture of depreciation, 2) appreciated inventory, and 3) accounts receivable owned by cash-method taxpayers.

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(The tax rate for a high-income taxpayer is 25% on the recapture of depreciation, while the regular tax rate is used for the recapture of depreciation for a low-income individual.)

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