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 ?
Recognized gain due to depreciation recapture: If the taxpayer has previously used the home as a rental dwelling, the adjusted basis of the home will be less than its cost because of the depreciation deductions allowed while the taxpayer used it as a rental dwelling.
Under Section 1031 of the Internal Revenue Code, individuals or businesses may exchange qualifying property for like-kind replacement property, and defer up to 100 percent of the capital gains and depreciation recapture taxes that would otherwise be owed on the sale of the property.
This includes saving taxes on any depreciation of the asset--unlike the 1031, where an investor may have to pay "depreciation recapture." In essence, an investor can use depreciation to offset income in the rest of the portfolio.
You also may owe a "depreciation recapture tax" if you took a home office deduction, rented out rooms or rented out the whole house.
However, selling depreciable plant and equipment may force the seller to recognize ordinary income from depreciation recapture.
* Depreciation recapture: Recent IRS allowances have allowed businesses to aggressively write off depreciable assets far faster than their useable life.
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.
For this reason, there is a benefit to retroactively changing the treatment of any fully depreciated property that can be recharacterized as a repair, eliminating possible depreciation recapture in a subsequent sale.
Citing case law and IRS code, the 24 chapters discuss gifts and inheritance, employee benefits, property transactions, life insurance and annuities, discharge of indebtedness, damages for physical injury, divorce and separation, business and income-producing expenses, capital gains and losses, depreciation recapture, and non-recognition provisions.
If depreciable property ([section]1245 property) is transferred, and only like-kind depreciable property is received in exchange, depreciation recapture (taxable ordinary gain) is generally not triggered.
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.