depreciation recapture


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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.

depreciation recapture

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.

References in periodicals archive ?
1245 and 1250, to convert all or part of the capital gain to ordinary income through depreciation recapture.
One major downside to the current law is the unequal treatment of depreciation recapture on real estate investments.
1) Although the Federal long-term capital gain rate is currently only 15%, straight-line depreciation recapture on real estate is 25%.
Other topics include multiple property, reverse, build-to-suit exchanges and related-party exchanges, and various tax incidents, such as boot, basis and depreciation recapture.
168(i)-4(c), business or income-producing property converted to personal use is treated as a disposition; however, the taxpayer recognizes no gain, loss or depreciation recapture on the conversion.
2003-107, serves as a reminder that not all real estate depreciation recapture by individual taxpayers is taxable at the 25% rate enacted by the Taxpayer Relief Act of 1997 (TRA '97).
The 2015 Special Distribution is in an amount that includes the sum of: estimated foreign earnings and profits repatriated as dividend income to be recognized in 2015; taxable income in 2015 from depreciation recapture in respect of accounting method changes commenced in Equinix's pre-REIT period; and certain other items of taxable income.
The 2015 Special Distribution is in an amount that includes the sum of: (1) estimated foreign earnings and profits repatriated as dividend income to be recognized in 2015; (2) taxable income in 2015 from depreciation recapture in respect of accounting method changes commenced in Equinix's pre-REIT period; and (3) certain other items of taxable income.
In addition, termination of a GAA may subject the taxpayer to depreciation recapture provisions under the Code.
Important to real estate are proposals to increase the depreciable lives of real property used in business or held for investment; raising the tax rate on gain from depreciation recapture and repealing the tax rules that allow taxpayers to exchange like-kind real estate on a tax-deferred basis.
IREM and CCIM Members representing 30 states and the District of Columbia will hold 180 meetings with their respective senators, representatives and their staffs to raise awareness of the industry's legislative positions on federally assisted housing, terrorism risk insurance and tax issues, including depreciation increases, depreciation recapture and like-kind exchange.
The original owner would have greater gain and depreciation recapture upon the sale of rental property held for a number of years.