What Is Depreciation Recapture And How Can I Avoid It?

Mar 21, 2024

5-minute read

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An illustrative image depicting the concept of recapturing depreciation in real estate investment, possibly involving property depreciation over time.

What is depreciation recapture, and how does it apply to assets such as real estate and property that you may have acquired? If you’re planning on selling an asset that you’ve depreciated for tax purposes, you’ll want to read the following guide.

Below, we take a closer look at how depreciation recapture can lead to a larger tax bill – and, with a little upfront planning, how you can avoid its impact on your finances.

What Is Depreciation Recapture?

“Depreciation recapture” refers to the Internal Revenue Service’s (IRS) policy that an individual can’t claim depreciation deductions for assets (thereby reducing their income tax) and then sell them for a profit without “repaying the IRS” through income tax on that profit.

By reporting the profit as ordinary income rather than as capital gains, which is taxed at a lower rate, the difference between the sale price and adjusted cost basis is “recaptured.”

What Is Depreciation?

Investment properties are depreciable, with depreciable assets available to investors ranging from the building (but not the land it sits on) to its contents. Noting this, the IRS has established various classes of assets and recovery periods of time over which these assets can be depreciated, based on their expected useful life.

For example, any residential property that has been placed in serv