Depreciation Recapture

Depreciation recapture is the process of returning the depreciation deductions that were taken on an asset when the asset is sold. This is done because the depreciation deductions were a form of tax deferral, and the government wants to collect the taxes that were deferred when the asset was sold.

The amount of depreciation recapture is equal to the difference between the depreciation deductions that were taken and the actual gain on the sale of the asset. For example, if an asset was purchased for $100,000 and depreciated over 10 years at a rate of 10% per year, the total depreciation deductions would be $10,000. If the asset was then sold for $120,000, the depreciation recapture would be $2,000 ($120,000 - $100,000 - $10,000).

Depreciation recapture is taxed at the ordinary income tax rate, which is typically higher than the capital gains tax rate. This means that depreciation recapture can result in a significant tax liability.

There are a few exceptions to the general rule of depreciation recapture. For example, if an asset is sold at a loss, there is no depreciation recapture. Additionally, some types of assets are eligible for special depreciation rules that can reduce or eliminate depreciation recapture.

It is important to be aware of the rules of depreciation recapture when selling an asset that has been depreciated. Failure to properly account for depreciation recapture can result in a significant tax liability.

Here are some additional things to keep in mind about depreciation recapture:

• Depreciation recapture is only triggered when an asset is sold. If an asset is donated or destroyed, there is no depreciation recapture.
• Depreciation recapture is not triggered when an asset is exchanged for another asset of like-kind. This is known as a like-kind exchange.
• Depreciation recapture can be deferred if an asset is sold and then replaced with a similar asset within a certain period of time. This is known as a Section 1031 exchange.

If you have any questions about depreciation recapture, you should consult with a tax advisor.