Depreciation recapture refers to the process where the IRS recovers the tax savings a taxpayer gained from claiming depreciation deductions on an asset, such as rental properties or business equipment, when that asset is sold. The recaptured depreciation is taxed at a different rate, often at ordinary income tax rates, or in the case of real estate, at a maximum rate of 25%.
For example, if you took $50,000 in depreciation deductions on a property and later sold it, the IRS will tax part of your gains as depreciation recapture. This ensures that the depreciation taken earlier is accounted for in the sale.
Key Points on Depreciation Recapture:
- What It Applies To: Real estate, business equipment, and other depreciable assets.
- Tax Rates: For real estate, up to 25%; for business equipment, ordinary income tax rates.
- Forms: Report recapture on IRS Form 4797.
How Does Depreciation Recapture Work?
- Asset Sale: You sell an asset that has been depreciated, such as a rental property or equipment.
- Depreciation Calculation: The IRS calculates the total depreciation claimed over the asset’s ownership.
- Tax Application: The depreciation amount is taxed either as ordinary income (for equipment) or at a maximum of 25% (for real estate).
- Form Submission: Depreciation recapture must be reported using IRS forms, typically Form 4797.
Depreciation Recapture Tax Rates
| Asset Type | Depreciation Recapture Tax Rate |
| Real Estate (Section 1250 Property) | Up to 25% |
| Business Equipment (Section 1245 Property) | Ordinary income tax rate |
| Vehicles (Used in Business) | Ordinary income tax rate |
| Personal Property | Not applicable (no recapture) |
FAQs about Depreciation Recapture
1. What is the tax rate for depreciation recapture on real estate?
The tax rate for depreciation recapture on real estate is capped at 25%.
2. Can depreciation recapture be avoided?
Yes, strategies such as a 1031 exchange may defer depreciation recapture if you reinvest in a similar property.
3. Is depreciation recapture applicable to personal property?
No, depreciation recapture typically applies only to business or investment property, not personal assets.
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