What it means
The logic is straightforward once you see it from the tax authority's side. Depreciation gives you a deduction each year on the assumption that the asset is losing value, and that deduction reduces your tax bill at ordinary income rates.
If you later sell the asset for more than its depreciated value, the original assumption was partly wrong, so the excess deduction is recovered at the same ordinary rates. The starting point is the adjusted basis, which is the original cost less all depreciation claimed.
Sell above that figure and you have a gain; the portion of the gain up to the total depreciation already taken is recaptured as ordinary income, and anything above the original cost is a genuine capital gain. That split is the whole concept in one sentence.
It matters commercially because it changes the after-tax proceeds of an asset sale, and therefore the economics of decisions such as fleet replacement, plant disposal and property sales. A business that models a disposal using only the capital gains rate can find itself materially short of cash when the tax bill arrives.
The gap is largest for assets that were depreciated aggressively and then held their value well. There is variation in how different tax systems apply the rule, and the details matter.
Some regimes recapture the full depreciation taken on equipment while treating buildings differently, sometimes at a special intermediate rate, and some allow deferral if the proceeds are reinvested in a similar asset within a set window. Getting local advice before signing a sale contract is far cheaper than getting it afterwards.
The planning nuance is timing rather than avoidance. Spreading disposals across tax years, pairing a recapture-heavy sale with losses elsewhere, or structuring the deal as an exchange rather than a sale can all reduce the immediate bill.
What rarely works is hoping the tax authority will treat a well-depreciated asset sold at a profit as a simple capital gain.
In practice
Real-world examples
Example 1
A groundworks contractor sells a five-year-old excavator for $180,000 after depreciating it to a book value of $60,000. The $120,000 gain is entirely recapture, and the resulting tax bill consumes a large part of the deposit he had earmarked for the replacement machine.
Example 2
A landlord sells a small commercial building she has owned for 14 years, having claimed steady depreciation on the structure throughout. Her accountant shows that a meaningful slice of the profit will be taxed at recapture rates rather than the capital gains rate she had assumed when setting her asking price.
Example 3
A retiring dentist sells surgery equipment along with the practice. Because the equipment was written down almost to nothing under accelerated allowances, nearly the entire allocated sale value is recaptured, and the purchase price allocation between equipment and goodwill becomes a serious negotiating point.
Think of it
Imagine borrowing a ladder from a friend and claiming a yearly discount on your chores because it is battered and missing a rung. When you eventually sell that ladder to a collector for cash, your friend makes you pay back the value of those past discounts.
Formula
Calculation
Adjusted basis = Original cost - Accumulated depreciation
Total gain = Sale price - Adjusted basis
Recapture taxed as ordinary income = Lesser of total gain or accumulated depreciation
Capital gain = Total gain - Recapture
A commercial printer bought a press for $400,000 and has claimed $250,000 of depreciation, so its adjusted basis is $400,000 - $250,000 = $150,000. Demand for that press is unexpectedly strong and it sells for $460,000. Total gain = $460,000 - $150,000 = $310,000.
Recapture is the lesser of the $310,000 gain and the $250,000 of depreciation taken, so $250,000 is taxed as ordinary income. At a 32% ordinary rate that is $80,000. The remaining $310,000 - $250,000 = $60,000 sits above the original cost and is a capital gain, taxed at 20% for $12,000. Total tax is $80,000 + $12,000 = $92,000, leaving $460,000 - $92,000 = $368,000 of after-tax proceeds. Had the press sold for only $320,000, the gain would be $170,000, all of it recapture, taxed at 32% for $54,400.Case study
Seen in the real world
Copperfield Haulage is an illustrative and entirely fictional trucking business used here to show recapture in a real decision. It ran a fleet of 12 lorries bought for $1,800,000 in total, on which it had claimed $1,350,000 of depreciation, leaving an adjusted basis of $450,000.
A shortage of used vehicles pushed second-hand prices up, and a buyer offered $1,050,000 for the fleet. The owner calculated a gain of $1,050,000 - $450,000 = $600,000 and budgeted tax at the 15% capital gains rate he had in mind, or $90,000. Because the whole $600,000 fell within the $1,350,000 of depreciation already claimed, it was all recaptured as ordinary income and taxed at 30%, producing a bill of $180,000.
The $90,000 shortfall arrived in the same quarter as the deposit on replacement vehicles, and the fictional company had to draw on its overdraft to bridge it. Nothing about the deal was wrong; the mistake was modelling the tax at the wrong rate before committing the proceeds.
Watch out
Common mistakes
- Modelling an asset sale using the capital gains rate on the whole profit, when the portion matching past depreciation is usually taxed as ordinary income at a higher rate.
- Confusing the accounting book value with the tax adjusted basis, which often differ because tax depreciation rules and accounting policies rarely match exactly.
- Committing the sale proceeds to a replacement asset before the tax on recapture has been calculated and set aside, which is how an otherwise good deal creates a cash squeeze.
Questions
People also ask
Does recapture apply if the asset sells at a loss?
No, because there is no gain to recapture; a sale below adjusted basis generally produces a deductible loss instead.
Can recapture be deferred?
In some tax systems yes, typically by exchanging the asset for a similar one within a defined period rather than taking cash, but the rules are strict and need local advice.
Does it apply to property as well as equipment?
Usually yes, though many systems treat buildings under separate provisions and sometimes at a distinct rate, so property disposals need to be checked specifically.