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

    An accelerated method for calculating an asset's depreciation. ...
  3. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  4. Capital Asset

    A type of asset that is not easily sold in the regular course ...
  5. Capital Gain

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

    Income received that is taxed at the highest rates, or ordinary ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  3. Taxes

    Avoid Capital Gains Tax On Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  4. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  5. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  6. Economics

    Understanding Explicit Costs

    Common examples of explicit costs include wages, utilities, rent, raw materials, and other direct expenses companies pay to conduct business.
  7. Investing Basics

    Cash Flow Lending Vs. Asset-Based Lending

    When companies need financing, they rely on two primary forms of lending: cash flow-based and asset-based lending. We look at the pros and cons of each.
  8. Investing Basics

    What Does Off-Balance Sheet Mean?

    Assets or debts that a company excludes from its balance sheet are off-balance sheet items.
  9. Investing Basics

    Explaining Noncurrent Liabilities

    Noncurrent liabilities are financial obligations a company owes a year or more into the future.
  10. Investing Basics

    Calculating Net Cash

    A company’s net cash is its total cash remaining after it subtracts all liabilities.
  1. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. How can companies use the cash flow statement to mislead investors?

    Cash flow is a means for most investors to examine the actual economics of a business they might invest in, especially from ... Read Full Answer >>
  4. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  5. Who actually declares a dividend?

    It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important ... Read Full Answer >>
  6. Are dividends considered an expense?

    Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!