Depreciation Recapture: The Tax Surprise When You Sell Business Assets
When you own valuable assets for your business — like dental equipment, delivery vehicles, office furniture, or even a commercial property — the IRS allows you to take depreciation deductions each year.
These deductions lower your taxable income while you own the asset, putting money back in your pocket now.
But when it’s time to sell, there’s a potential catch: Depreciation Recapture.
This is the IRS’s way of “clawing back” some of those past tax benefits if you sell the asset for more than its depreciated value.
How It Works
Depreciation recapture applies when:
- You’ve claimed depreciation on an asset during its useful life.
- You sell the asset for more than its adjusted basis (purchase price minus total depreciation claimed).
The “recaptured” amount — up to the total depreciation you took — is taxed, usually as ordinary income (not the lower capital gains rate).
Example for a Dental Practice
- You buy dental imaging equipment for $50,000.
- Over 5 years, you deduct $30,000 in depreciation.
- Your adjusted basis is now $20,000.
- You sell the equipment for $35,000.
Your tax outcome:
- Gain = $15,000 ($35K sale – $20K adjusted basis).
- The IRS treats this $15,000 as depreciation recapture because it’s within the amount of depreciation you already deducted.
Example for an Amazon Seller
- You buy warehouse shelving for $10,000.
- Claim $7,000 in depreciation over a few years.
- Adjusted basis = $3,000.
- Sell the shelving for $5,500 → Gain of $2,500.
- That $2,500 is recaptured depreciation and taxed as ordinary income.
Example for a Commercial Property Owner
Recapture works differently for real estate, where part of the gain is taxed as “unrecaptured Section 1250 gain” at a maximum 25% rate.
If you own a building, you need a CPA to calculate the exact breakdown between capital gains and recapture.
Why Planning Ahead Matters
- Cash flow impact: Depreciation recapture can significantly reduce your net profit from a sale if you don’t plan for it.
- Entity choice: Whether you operate as an LLC, S Corporation, or C Corporation can affect the overall tax treatment.
- Timing strategies: Coordinating the sale with other deductions or losses may help offset the recapture amount.
How Velin & Associates, Inc. Helps
Our team specializes in helping business owners — from dentists and medical professionals to Shopify store owners, Amazon sellers, and service-based entrepreneurs — minimize surprise tax bills when selling assets.
We can:
- Calculate your potential depreciation recapture before you sell.
- Develop strategies to offset the tax hit.
- Help you structure asset sales in the most tax-efficient way possible.
Don’t let depreciation recapture catch you off guard.
With the right tax planning, you can maximize your sale proceeds and keep more of what you’ve earned.
For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.