Understanding Depreciation Recapture

Depreciation Recapture

What Is Depreciation Recapture?

When you sell a depreciated asset, you may owe tax on the depreciation you've claimed. The IRS 'recaptures' those deductions upon sale.

Section 1245 Property (Personal Property)

• Equipment, vehicles, furniture
• Depreciation recaptured as ordinary income (up to 37%)
• Any remaining gain is capital gain

Section 1250 Property (Real Property)

• Buildings and improvements
• Recaptured depreciation taxed at unrecaptured Section 1250 gain rate: Maximum 25%
• Any remaining gain is capital gain (0/15/20%)

Example: Rental Property Sale

• Purchased for $300,000; took $50,000 in depreciation
• Adjusted basis: $250,000
• Sold for $400,000
• Total gain: $150,000
  • $50,000 unrecaptured 1250 gain (taxed at 25%)
  • $100,000 long-term capital gain (taxed at 15-20%)

Avoiding Recapture

• 1031 Exchange: Defer recapture by rolling into a new property
• Dying with the property: Heirs receive stepped-up basis; no recapture
• Charitable donation: Donate the property; avoid recapture

Cost Segregation and Recapture

If you've done a cost segregation study, more depreciation has been accelerated into Section 1245 property, which faces higher recapture rates.

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Planning to sell a depreciated asset? Recapture tax planning can significantly affect your proceeds.