Question

1. Why do we have depreciation recapture? What does depreciation recapture accomplish?
2. What is the difference between 1245 recapture and 1250 recapture? Is there a different tax rate?
3. How would you report 1231 gain on a tax return? How would you report ordinary recapture?

Answer 1

1. Depreciation recapture is the procedure that is being used in order to collect the tax on income in regard to profit or gain that is being made by the assessee in relation to sale of the asset on which depreciation had been claimed in the earlier years. The depreciation recapture helps in taxation of the gain on a depreciable asset.
2. The 1245 recapture provides that gain on sale of tangible or intangible depreciable property of personal nature should be recorded to the extent of the depreciation already claimed from income and should be recorded as ordinary income and will be taxed at rates of taxation of ordinary income. The 1250 recapture provides that gain on sale of the real estate property on which accelerated depreciation was used will be taxed at rates of ordinary income till the amount of deducted depreciation. The rates of both the recapture are same.
3. The amount of section 1231 gain on tax return will be reported as the long term gain but if in the earlier periods there was section 1231 loss then the amount till the level of 1231 loss will be treated as ordinary income. The ordinary recapture are recorded as ordinary income.