Depreciation Recapture
Candlefocus EditorWhen a taxpayer sells an asset that was used to offset taxable income, the taxpayer may be required to recapture the depreciation taken as a deduction on their taxes. Generally, the recaptured depreciation is taxed as ordinary income at the taxpayer’s marginal tax rate. For example, if a taxpayer takes a deduction of $10,000 in depreciation over five years on $100,000 of an asset and then sells the asset for $150,000, the taxpayer’s ordinary tax rate will be applied to the $50,000 gain of the sale over and above the adjusted cost basis of the asset.
While Depreciation Recapture applies to most assets, special caps may limit the amount of taxable income for certain capital gains related to real estate investments. For example, for gains in 2021 and 2022, the maximum tax rate for depreciation recapture on real estate gains may not exceed 25%. It is important to Note that this is an area of taxation where federal and often state laws are subject to change, and consequently it is important to stay informed of the latest rules and regulations regarding depreciation recapture.
To calculate the amount of taxable income that must be reported in Depreciation Recapture, the taxpayer must compare the adjusted cost basis of the asset to the sale price of the asset. The adjusted cost basis is the original cost of the asset minus any depreciation that has previously been claimed for the asset. The sale price of the asset is the amount of money the taxpayer received in exchange for the asset. The difference between the adjusted cost basis and the sale price is the amount of gain to which the taxpayer may be subject to Depreciation Recapture.
It is important to recognize that Depreciation Recapture is an important part of the taxation process that should not be overlooked by taxpayers. Properly reporting any asset sales to the IRS can ensure that tax liabilities are accurately reported, and reduce the chances of any penalties or interest due to tax liabilities that were previously unaccounted for.