A section of the
Internal Revenue Code that 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 Section 1250 to make up for some of the tax revenue lost in the depreciating asset. This is called
recapture of depreciation; it is assessed if the assets are sold for a
price higher than their depreciated value. For example, suppose one
buys a computer for $700 and, after a year, it depreciates to $600. If one then sells the computer for $650, one has recaptured $50 worth of depreciation. This $50 is taxed as ordinary income.