Depreciation recapture

Tax charged on sale for the depreciation deductions an owner took during the years they held the asset, separately from tax on the remaining gain.

Example

A 90,000 gain of which 40,000 was previously depreciated, taxed illustratively at 25% and 15%, gives 17,500 - a blended 19.444% rather than 15%.

Important

The deduction reduced ordinary income each year, so the system takes it back at sale. Budgeting a single capital gains rate leaves an owner short on completion day, and whether any of this applies depends entirely on the country.

Related terms

• Capital gain — The profit made by selling an asset for more than it cost, as distinct from the income the asset paid you while you held it.
• Depreciation and amortisation — The accounting charge that spreads the cost of a long-lived asset across the years it is expected to be used - depreciation for physical assets, amortisation for intangible ones.
• Taxable event — The moment a tax system treats something as having happened - most commonly a sale, rather than an increase in value while you still hold the asset.

Lessons that explain it

• Leverage runs both ways, the round trip costs six per cent, and selling takes months — A mortgage multiplies the price move by four in either direction. The transaction costs are fifty times a broad fund's. And the exit is measured in months, at a price you negotiate rather than accept. (13 min)

All 578 terms in the Investing glossary