Depreciation Recapture

AAA

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.

INVESTOPEDIA EXPLAINS '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).

RELATED TERMS
  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. Capital Asset

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

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

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

    1. A method of allocating the cost of a tangible asset over its ...
Related Articles
  1. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

  2. Depreciation: Straight-Line Vs. Double-Declining ...
    Forex Education

    Depreciation: Straight-Line Vs. Double-Declining ...

  3. Avoid Capital Gains Tax On Your Home ...
    Taxes

    Avoid Capital Gains Tax On Your Home ...

  4. What is the difference between amortization ...
    Investing

    What is the difference between amortization ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center