Depreciation Recapture: What Selling Business Property Before Year-End Actually Triggers
Selling business property before year-end can be a reasonable move for any number of business reasons — but it's worth understanding what depreciation recapture actually does to the tax result first, especially now that 100% bonus depreciation has made it common to have fully depreciated assets sitting on the books.
The Basic Mechanics
Depreciation recapture generally converts what would otherwise be a favorably taxed capital gain back into ordinary income, to the extent depreciation was previously claimed on the asset. The theory is straightforward: if a business deducted the cost of an asset against ordinary income, and then sells that asset for more than its depreciated basis, the government wants at least some of that gain taxed at ordinary rates rather than the lower capital gains rate — since the deduction that created the gap was itself an ordinary deduction.
Section 1245 Property: Equipment, Machinery, Vehicles
For most tangible personal property used in a business — equipment, machinery, business vehicles, and similar assets — gain on sale is generally recaptured as ordinary income to the extent of all depreciation previously claimed, including bonus depreciation and Section 179 deductions. Because 100% bonus depreciation means an asset can be fully written off in its first year, it's entirely possible for an asset with several years of remaining useful life to have zero remaining basis, meaning essentially the entire sale price is recaptured as ordinary income rather than capital gain.
Section 1250 Property: Buildings and Real Property
Real property depreciation works somewhat differently: the portion attributable to straight-line depreciation is generally taxed as "unrecaptured Section 1250 gain," subject to a maximum rate of 25% rather than full ordinary rates, with the remainder taxed at standard capital gains rates. Real property that received accelerated depreciation through a cost segregation study, however, can have components subject to the harsher Section 1245-style recapture rather than the more favorable 1250 treatment, depending on how the components were classified.
Why This Matters More Under Current Depreciation Rules
The combination of 100% bonus depreciation and higher Section 179 limits means businesses are depreciating assets fully and immediately far more often than under the phased-down rules of the past few years. That's a genuine tax benefit at the time of purchase — but it also means the recapture exposure on eventual sale is often larger and more immediate than it would have been under a slower depreciation schedule, since there's simply less remaining basis to offset the sale price.
What to Check Before Selling Before Year-End
Before selling business property this year, it's worth running the actual recapture calculation rather than assuming the sale will be taxed at capital gains rates. Timing the sale into next year, structuring it differently, or offsetting the recaptured income with other planning moves may all be worth considering once the real number is known — but that only works if the calculation happens before the sale, not after.
This information is educational and describes the general operation of depreciation recapture under current law. It does not calculate the recapture amount for a specific asset or transaction. If you're considering selling business property before year-end, our tax planning team can run the actual numbers before the sale happens, not after.
Related service: Tax Advisory & Planning
Comments