Depreciation recapture

Depreciation recapture is the difference between the tax basis of an asset and its sale price, when the sale price exceeds the tax basis. This gain must be reported as ordinary income, since the depreciation originally taken on the asset provided the taxpayer with a reduction of its ordinary income. If the gain exceeds the original amount of the depreciation, the excess amount may be treated as a capital gain.

For example, ABC Industrial buys equipment for $20,000, which ABC then depreciates over the following four years at the rate of $2,000 per year, resulting in a net book value of $12,000. ABC then sells the equipment for $13,000. Since the sale price exceeds the net book value by $1,000, this difference is treated as depreciation recapture.

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