Depreciation Recapture

Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer’s ordinary income, the taxpayer has to report any gain from the disposal of the asset (up to the recomputed basis) as ordinary income, not as a capital gain. Any gain over the recomputed basis will be taxed as a capital gain in accordance with section 1231 of the Internal Revenue Code (IRC). This article is about the system used in the USA and Canada, but other countries have similar procedures. In the UK, HMRC uses "negative depreciation".

Depreciation recapture in the USA is governed by sections 1245 and 1250 of the IRC.