Depreciation Recapture


DEFINITION of 'Depreciation Recapture'

The gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the tax basis of an asset exceeds the sale price. The difference between these figures is thus "recaptured" by being reported as income.

Depreciation recapture is reported on Form 4797.

BREAKING DOWN 'Depreciation Recapture'

When property is depreciated, the basis of the property is reduced by the amount of depreciation taken. If the sale price is larger than amount of depreciation that has been taken, the difference will be reported as either ordinary income or capital gain, depending on the type of property that is sold.

For example, suppose that Frank buys business equipment for $10,000 and uses it for eight years. The total depreciation deduction is $6,000. Then he sells the equipment for $6,000. He must declare a "recaptured" gain of $2,000, the difference between the actual sales price and the depreciated tax basis of $4,000 ($10,000-$6,000).

  1. Unit of Production Method

    A depreciation procedure used for property that is not in continuous ...
  2. Sum-Of-The-Years' Digits

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  3. Capital Asset

    A type of asset that is not easily sold in the regular course ...
  4. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  5. Ordinary Income

    Income received that is taxed at the highest rates, or ordinary ...
  6. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
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