727 / How does the depreciation deduction impact an individual’s basis in the property? Must depreciation ever be “recaptured”?
Recapture
Upon disposition of property, the seller often realizes more than return of basis after it has been reduced for depreciation. Legislative policy is that on certain dispositions of depreciated property the seller realizes a gain that is, at least in part, attributable to depreciation. To prevent a double benefit, the IRC requires that some of the gain that would otherwise generally be capital gain must be treated as ordinary income. In effect, it requires the seller to “recapture” some of the ordinary income earlier offset by the depreciation.2 In addition, if depreciated property ceases to be used predominantly in a trade or business before the end of its recovery period, the owner must recapture in the tax year of cessation any benefit derived from expensing such property.3 This provision is effective for property placed in service in tax years ending after January 25, 1993.4
1. IRC § 1016(a)(2).
2. IRC §§ 1245, 1250.