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Categories: General Tax Terms

Recapture

Recapture refers to the process of recovering previously deducted tax benefits or credits when an asset is sold or disposed of. It often applies in the context of depreciation recapture, where the IRS requires taxpayers to report gain on the sale of depreciated assets, effectively taxing the gain to the extent of the depreciation taken.

In detail, when a business claims depreciation on an asset, it reduces taxable income. Upon selling the asset for more than its adjusted basis (original cost minus accumulated depreciation), the taxpayer must "recapture" the depreciation by including it as ordinary income up to the amount of the depreciation that was claimed. For example, if a machine was purchased for $10,000 and depreciated down to $4,000 over its useful life, and later sold for $6,000, $2,000 of the gain would be subject to recapture, taxed as ordinary income rather than capital gains.

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