Depreciation recapture is the income/gain that comes from a depreciable tangible property such as a house. It’s one of the inevitable things that everyone involved in real estate should know about. The depreciation recapture is assessed when the sale price of an asset, in this case, – a house exceeds the adjusted cost basis or tax basis.
The difference between metrics equal to the depreciation recapture. Regardless of the type of property, depreciation recapture must be reported using Form 4797.
Understanding depreciation recapture
Every business has operations that involve the purchase of properties. The first thing that’s done when calculating the deprecation recapture is to determine the original purchase price. This is the amount the business used for purchasing the property. Then, the depreciation cost is determined. Assume the property was purchased for $20,000 and had an expense of $3,000 every year for three years. The adjusted cost basis of the property in this example is $11,000 as $9,000 was spent during the lifetime of the property and purchased by $20,000.
Now, there needs to be a comparison between the adjusted cost basis and the sale price of the property. If the property is sold for over the adjusted cost basis ($11,000), any income above it is considered as a gain, thus, taxed as ordinary income. This will contribute to your gross income like the income earned through a business operation.
What you can do is take your calculator and compare these two and see if you have a gain. If so, you’ll pay taxes on the gain. If not, you can write it off as a loss. You can also use the depreciation recapture calculator to handle this for multiple properties. Make sure to enter the amounts right as it can lead to amending your return after submitting it as the recaptured amount won’t be accurate.
There is no difference between other types of tangible properties whether it’s real estate or business equipment. The same goes for real estate purchased to complete business operations. It’s all taxed the same way as far as the IRS is concerned.