depreciation recapture

depreciation recapture

See recapture of depreciation.

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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.

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depreciation recapture

A tax law provision that some depreciation expenses taken on real property must be “recaptured” upon a sale of the asset and taxes paid at ordinary income rates rather than capital gains rates. Ordinarily, property held for more than one year and then sold will qualify for capital gains tax rates,which are lower than ordinary income tax rates.

There are two exceptions in which some or all of the gain must be taxed at ordinary income rates:

1. If depreciation was taken on personal property, that portion of the gain that is equal to total depreciation taken over the years will be taxed at ordinary income rates.

2. If accelerated depreciation was taken on real property (see depreciation methods for an explanation), then that portion of the gain represented by the difference between straightline depreciation and the accelerated depreciation will be taxed at ordinary income rates.