What Is Depreciation Recapture and Why Does It Surprise Sellers?
Sam's List Editorial | 2026-07-29
What Is Depreciation Recapture and Why Does It Surprise Sellers? Depreciation recapture is the rule that taxes part of your gain on a sold asset as ordinary income, or at a higher capital gain rate, to account for the depreciation deductions you already took. It is not a penalty and it is not an extra tax on the sale. It is the tax code collecting on a deduction it lent you earlier. The reason it surprises people is timing. The deduction arrived in small annual pieces over many years. The bill arrives all at once, in the year you sell, and it is calculated against a basis that your own deductions shrank. Why the Rule Exists Depreciation gives you an ordinary deduction, which offsets ordinary income taxed at your regular rate. Without recapture, you could take deductions at ordinary rates and then pay tax on the resulting gain at preferential long-term capital gain rates. That gap is what recapture closes. The mechanic is straightforward. Every dollar of depreciation reduces your adjusted basis. A lower basis means a larger gain on sale, even if the asset's value never moved. Then recapture determines the character of that gain, meaning what rate applies. The part that catches sellers: under section 1016 the basis reduction is based on depreciation "allowed or allowable." If you were entitled to depreciation and never claimed it, your basis is still generally treated as reduced. Skipping the deduction does not preserve the basis. Section 1245: Equipment and Personal Property Section 1245 covers most depreciable personal property: machinery, equipment, vehicles, furniture, and certain qualifying components. The rule is blunt. On sale, gain is treated as ordinary income up to the total depreciation taken, and only the amount above that is capital or section 1231 gain. Bonus depreciation and section 179 expensing make this more common than it used to be, because an asset expensed to zero has no basis left to shelter the sale price. Worked example. You buy equipment for $80,000 and fully expense it, so adjusted basis is zero. Sell it for $30,000. The entire $30,000 is section 1245 ordinary income, because gain is less than the depreciation taken. Sell it for $95,000. The first $80,000 is ordinary income, and the remaining $15,000 is section 1231 gain, which generally receives long-term capital gain treatment. Ordinary income means your regular marginal rate. For a profitable business owner, that can be a substantially different number than the capital gain rate they had in mind. Section 1250: Buildings and Real Property Real property works differently, and...
