# Depreciation Recapture on Equipment Sale

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Last modified: 2026-05-29T19:39:17+00:00
Type: efin_guide

## Summary

Depreciation Recapture on Equipment Sale. Comprehensive guide.

## Content

Depreciation recapture happens when you sell or dispose of equipment for more than its adjusted basis. The gain (up to the amount of prior depreciation deductions) is taxed as ordinary income, not capital gains. Understanding recapture matters for tax planning around equipment sales, trade-ins, and lease-end buyouts.

The core idea
When you buy equipment for $100,000 and claim $80,000 in depreciation deductions over 5 years, the equipment's "adjusted basis" is $20,000. If you sell it later for $35,000, you have a $15,000 gain. The IRS recaptures that $15,000 as ordinary income because it represents previously-deducted depreciation that didn't actually correspond to the asset losing value.

Recapture amount calculation
Recapture = lesser of:

Total prior depreciation deductions (§179 + bonus + MACRS), or
Gain on sale (sale price - adjusted basis)

Example: $100,000 equipment, $80,000 prior deductions, sold for $35,000:

Adjusted basis = $100,000 - $80,000 = $20,000
Gain on sale = $35,000 - $20,000 = $15,000
Recapture = lesser of $80,000 (deductions) or $15,000 (gain) = $15,000
Recapture is taxed as ordinary income


When recapture is bigger
Same equipment, sold for $150,000 instead of $35,000:

Gain on sale = $150,000 - $20,000 = $130,000
Recapture = lesser of $80,000 or $130,000 = $80,000 (ordinary income)
Remaining $50,000 = capital gain (lower rate)


Section 1245 vs 1250 property
Most equipment is §1245 property: personal property used in business. Recapture rules above apply.
Real estate is §1250 property with different (more favorable) recapture rules. Not relevant to most equipment financing.

How financing structure affects recapture

Equipment loan or $1 buyout lease: you own and depreciate. Sale triggers recapture as described above.
FMV true lease: the lessor owns and depreciates. You don't have recapture when the lease ends, but the lessor does on their sale at term-end.
Trade-in (Section 1031 like-kind, pre-TCJA): historically, equipment trades let you defer recapture. The 2017 Tax Cuts and Jobs Act eliminated like-kind treatment for personal property. Now equipment trade-ins trigger immediate recapture on the disposal.


Planning around recapture

Time the sale. Selling in a low-income year reduces the tax cost.
Match with capital losses. Recapture is ordinary income; you can't offset with capital losses, but ordinary losses elsewhere can soak it up.
Consider trade-in tax implications. Trade-in does not avoid recapture; only changes timing.
Watch §179 recapture if business use drops. If business-use percentage falls below 50% before end of recovery period, §179 recapture applies even without sale.


Common situations

Truck sold private-party for cash: straightforward §1245 recapture
Equipment trade-in at dealer: treated as sale (recapture) + purchase (new basis); no deferral
Insurance proceeds after total loss: recapture applies if proceeds exceed basis
Donating equipment to charity: deduction limited to lesser of FMV or basis; recapture rules limit to basis in some cases


Not tax advice. Recapture rules are complex and have many exceptions. Consult your CPA before disposing of equipment.