What is depreciation recapture? (Explained in Pictures)

Depreciation recapture happens when you sell something and the gain or a portion of the gain is classified as ‘ordinary income’ (instead of capital gain which has more favorable tax rates).

Depreciation recapture depends on the type of property that’s involved.

In this example, it shows depreciation recapture for s 1250 gain (the yellow part in the images below) and s 1231 gain (green part).

The part of the gain that is classified is ordinary income (s 1250) represents the amount of excess depreciation that was previously claimed over an amount of straight-line depreciation.

It’s best to explain this in pictures. The first picture shows a bar with the amount of a piece of property, furniture purchased for $100 along with the depreciation claimed ($70) and the amount of straight-line depreciation ($60 and not claimed). It also shows you the adjusted basis (i.e. how much the property is worth in the hands of the seller) of $30. The second picture shows the depreciation being recaptured in the blue, green and purple arrows.

Explainer Image 1: Depreciation and amount of excess depreciation available for recapture.

Explainer Image 2: Depreciation recapture based on selling price

Depreciation recapture is ‘recapturing’ the amount of depreciation back (that was used to deduct from income) and showing that now as ordinary income. It’s kind of done as a ‘fairness’ thing.

I hope you found this explanation with images/pictures of depreciation recapture useful.

Next: Types of Depreciation Methods and their Formulas (US IRS Taxation)

Sign up to post comments

Have A Question?

Get in touch!