Depreciation Recapture
Depreciation recapture requires taxpayers to recognize previously claimed depreciation as income when selling an asset - ordinary income for Section 1245 property, 25% max for unrecaptured Section 1250 gain.
Exam Tip
Section 1245 (personal property) = ordinary income. Unrecaptured 1250 (real estate) = 25% max. 1031 exchange defers. Death = step-up.
What is Depreciation Recapture?
The IRS "recaptures" the tax benefit from depreciation when you sell.
Types
| Type | Property | Max Rate |
|---|---|---|
| Section 1245 | Personal property | Ordinary (37%) |
| Unrecaptured 1250 | Real property | 25% |
How to Avoid
- 1031 Exchange (defer)
- Death (step-up eliminates)
- Charitable donation
Study This Term In
Related Terms
1031 Exchange
A 1031 exchange is a tax-deferred transaction under IRC Section 1031 that allows real estate investors to sell an investment property and reinvest the proceeds in a "like-kind" property while deferring capital gains taxes, provided strict IRS deadlines are met.
Long-Term Capital Gains
Long-term capital gains are profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on taxable income, significantly lower than ordinary income tax rates.
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