Accounting & tax
Depreciation recapture
Tax rules that can characterize part of the gain on disposed depreciable property by reference to prior depreciation allowed or allowable.
Glossary
Accounting & tax
Primary references on this page:
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IRS Publication 946: How To Depreciate PropertyDepreciation recapture is a set of tax rules applied when depreciable or amortizable property is disposed of at a gain. Depending on the property and transaction, some gain may receive ordinary-income or other special treatment before any remaining gain is classified. It is not accurately described as simply paying every prior deduction back.
The calculation begins with reliable basis and depreciation records. Adjusted basis reflects depreciation allowed or allowable, which means failing to claim an available deduction does not necessarily preserve basis. Improvements and separately identified assets may follow different recovery and disposition histories.
A rental-property sale can involve land, building, appliances, improvements, selling costs, debt payoff, and perhaps a deferred or like-kind transaction. Gross cash received at closing is not taxable gain, and taxable gain is not necessarily cash remaining after the mortgage. Each bridge must be calculated separately.
Before marketing or refinancing a property, assemble the acquisition allocation, improvement register, depreciation schedules, prior exchanges, casualty adjustments, and proposed sale assumptions. A qualified tax professional should model the transaction because entity structure, asset class, holding period, and current law can materially change the answer.
The four-number sale bridge
A useful review starts with amount realized, subtracts supported selling costs where applicable, and compares the result with adjusted basis to determine gain or loss. Only then are character and recapture rules applied. Debt payoff belongs in the cash-to-owner bridge, not as an automatic reduction of tax gain.
Permanent records to preserve
The IRS identifies acquisition, cost or other basis, depreciation or amortization, and other basis adjustments as records needed to figure gain that may be ordinary. Keep those records beyond the annual bookkeeping cycle.
This is general educational information, not legal or tax advice. Rules vary by state and locality and change over time — check your local law and confirm specifics with a qualified professional.