How do you calculate depreciation recapture?


Quick Answer

Depreciation recapture is calculated by adding back the depreciation expense to date that has been taken on an eligible asset after it has been sold, notes About.com. The purpose of the depreciation recapture is to properly allocate tax rates to a gain on the sale of an asset.

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Full Answer

Certain assets that are purchased can be eligible for depreciation expense. This expense is taken over the useful life of the asset, notes Chron.

While there are numerous depreciation calculation methods, depreciation expense always needs to be recaptured if the associated property is sold, states About.com. The amount that is considered depreciation recapture is normally taxed as ordinary income, whereas any additional amount, as part of the sale price, is taxed at a more favorable capital gains rate.

The Internal Revenue Code lists two types of assets that are subject to depreciation recapture rules. The first is 1245 property, which consists of depreciable personal property and certain depreciable real property, according to the Internal Revenue Service. The other type is referred to as 1250 property. This property consists of all real property not included in Section 1245 property. The depreciation recapture rules apply to both 1245 and 1250 property, however there are certain exceptions under each type depending on when the property was purchased.

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