Does depreciation recapture apply even if I sold the asset at a loss?

If you sell an asset for less than its adjusted basis (original cost minus total depreciation taken), you have a loss — not recapture. Recapture only applies when you sell at a gain above the adjusted basis. However, if you took Section 179 or bonus depreciation and the adjusted basis is $0, even a modest sale price is all gain — and all of that gain up to the original cost is subject to recapture.

Can I avoid depreciation recapture with a 1031 exchange?

Yes — a 1031 like-kind exchange defers both the capital gain and the depreciation recapture by rolling the basis into a replacement property. The deferred recapture carries over to the new property. When you eventually sell the replacement property without a 1031 exchange, recapture becomes due. 1031 exchanges only apply to real property (post-2017 TCJA — personal property no longer qualifies).

Does recapture apply when the asset is fully depreciated?

Yes — and it's the entire gain up to the original cost basis. If you bought equipment for $50,000, depreciated it fully to $0 adjusted basis, and sell it for $20,000, the entire $20,000 is Section 1245 recapture taxed at ordinary income rates. There's no long-term capital gain portion because the gain doesn't exceed the original cost.

How does recapture affect the calculation when selling a business?

In an asset sale, each asset category is taxed separately based on its character. Equipment and vehicles sold above adjusted basis trigger Section 1245 recapture at ordinary rates. Real property triggers Section 1250 recapture at 25%. Goodwill and customer relationships are generally capital gain. This is why the allocation of purchase price in a business sale significantly affects total tax — buyers and sellers often want to allocate differently.

What happens to recapture in a stock sale vs asset sale?

In a pure stock sale (selling S-corp or C-corp shares), the seller has only capital gain on the stock — no asset-level recapture because the assets aren't technically being sold; ownership of the entity is changing. This is one reason sellers prefer stock sales. In an asset sale, each asset is sold individually, and recapture applies to each depreciable asset at the entity level.

Tax planning

Depreciation Recapture: Why Selling Business Assets Costs More Than You Expect

When you sell a business asset you've depreciated, the IRS 'recaptures' those deductions — taxing the gain up to the amount of depreciation taken at ordinary income rates. Understanding recapture is essential for planning any business asset sale or business exit.

Written by Matt Reese, CPA · 7 min read · Published April 2026·Share on LinkedIn

Key Takeaways

Depreciation recapture means the IRS taxes back the benefit of deductions you previously claimed when you sell an asset at a gain. The 'recaptured' amount is generally taxed at higher ordinary income rates, not capital gains rates.
Section 1245 recapture applies to personal property (equipment, vehicles, machinery). All accumulated depreciation is recaptured at ordinary income rates, up to the amount of gain.
Section 1250 recapture applies to real property (buildings). The rate is 25% on unrecaptured Section 1250 gain (accelerated depreciation over straight-line). Straight-line depreciation on real estate is taxed at this 25% rate.
Taking bonus depreciation or Section 179 in year one doesn't eliminate recapture — it accelerates it. If you expense equipment fully in year one and sell it in year two, you have more recapture than if you depreciated it slowly.

Why depreciation creates future tax liability

Depreciation deductions reduce your taxable income in the years you claim them. But they also reduce your adjusted basis in the asset — the starting point for calculating gain when you sell.

When you sell the asset, the IRS compares the sales price to your adjusted basis. If you’ve been depreciating aggressively (Section 179, bonus depreciation), your adjusted basis may be near zero — meaning most or all of the sales price is taxable gain.

The “recapture” rule then sorts that gain into buckets:

Gain up to the amount of depreciation previously deducted → taxed at ordinary income rates (the recapture)
Gain above the original cost → taxed at long-term capital gain rates (if held more than a year)

Bonus depreciation and Section 179 give you the deduction now — but when you sell, the IRS collects ordinary income tax on that recaptured amount. The deduction was a deferral, not a permanent elimination.

Section 1245: equipment and personal property

Section 1245 property includes tangible personal property used in a business: machinery, equipment, computers, vehicles, and furniture. It also includes certain intangibles like patents and amortizable assets.

For Section 1245 property, all depreciation is recaptured at ordinary income rates, up to the amount of gain. Only gain above the original cost basis is eligible for capital gain treatment — which is rare in practice.

Section 1245 recapture — equipment sale

Original cost$80,000

Depreciation taken (Section 179 year one)−$80,000

Adjusted basis$0

Sale price (3 years later)$25,000

Total gain (sale price − adjusted basis)$25,000

Section 1245 recapture (up to depreciation taken = $80,000)$25,000 ordinary income

Capital gain portion$0

Tax at 37% federal rate$9,250

Expensing $80,000 equipment in year one and selling it for $25,000 in year three means the $25,000 proceeds are fully taxed as ordinary income — not capital gain. The full Section 179 deduction was still beneficial (deferred taxes for years), but the sale creates a tax bill that surprises owners who expected capital gain treatment.

Section 1250: real property (buildings)

Section 1250 applies to real property — commercial buildings, rental properties, and structural improvements. The rules are different from Section 1245:

Residential rental property is depreciated over 27.5 years (straight-line)
Commercial property is depreciated over 39 years (straight-line)
Straight-line depreciation on real property creates unrecaptured Section 1250 gain — taxed at a maximum federal rate of 25%
Gain above the original cost is taxed at regular long-term capital gain rates (0%, 15%, or 20%)

Section 1250 recapture — commercial building sale

Original purchase price$500,000

Depreciation taken over 10 years (39-year straight-line)−$128,205

Adjusted basis$371,795

Sale price$700,000

Total gain$328,205

Unrecaptured Section 1250 gain (taxed at 25%)$128,205

Section 1231 capital gain (taxed at 20%)$200,000

Federal tax on recapture portion ($128,205 × 25%)$32,051

Federal tax on capital gain portion ($200,000 × 20%)$40,000

The 25% rate on unrecaptured Section 1250 gain is higher than the 15% or 20% long-term capital gains rate — which is why owning real estate for years and depreciating it creates a tax rate that surprises many owners at sale. Add NIIT (3.8%) and California state tax, and the effective rate on the recapture portion can exceed 40%.

How Section 179 and bonus depreciation affect recapture

Section 179 and bonus depreciation let you expense assets fully in year one rather than depreciating over 5–7 years. The tax benefit is real: deducting $100,000 today instead of $14,000 per year for 7 years saves taxes now and defers more for later.

But when you sell the asset:

Adjusted basis is $0 (fully expensed)
Any sale proceeds are 100% recapture
Recapture is at ordinary income rates (up to 37% federal)
If you had only used straight-line depreciation, some of the gain might have been capital gain

Asset: $60,000 equipment, sold 2 years later for $30,000	Section 179 (expensed year 1)	Straight-line (5-year, $12,000/year)
Year 1 deduction	$60,000	$12,000
Year 2 deduction	$0	$12,000
Adjusted basis at sale	$0	$36,000
Gain at sale	$30,000	$0 (sold below basis — loss of $6,000)
Recapture character	Ordinary income ($30,000)	Section 1231 loss ($6,000 ordinary loss)
Tax at 37% federal	$11,100 tax	$2,220 tax benefit

Bonus depreciation timing matters when a sale is foreseeable

If you anticipate selling equipment within a few years — especially vehicles or specialized equipment — run the math on bonus depreciation vs. straight-line before electing. In some situations, straight-line depreciation over the holding period produces better net after-tax results than a large first-year deduction followed by recapture on the sale proceeds.

Model your exit tax before you sell

See how recapture, deal structure, and California affect your net proceeds.

Run the estimator

Section 1231 property: the best of both worlds

Assets used in a business for more than one year are generally Section 1231 property. This classification is favorable:

Net Section 1231 gains are taxed at long-term capital gain rates
Net Section 1231 losses are fully deductible as ordinary losses (not subject to the $3,000 capital loss limit)

The recapture rules operate inside this framework — reducing the Section 1231 gain. Recaptured depreciation becomes ordinary income, while the remaining Section 1231 gain gets capital gain treatment.

Model the recapture before the sale — not after

Depreciation recapture is a known quantity before you sell. Your CPA can run a recapture analysis showing exactly how much ordinary income and capital gain will result from a sale at any given price. This is a critical input for business sale negotiations, installment sale planning, and timing decisions. Don’t discover the recapture tax for the first time on the return after the sale has closed.

You might also read

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Section 179 and Bonus Depreciation: How to Deduct Equipment and Vehicles in Year One

Section 179 and bonus depreciation let businesses deduct the full cost of qualifying equipment, vehicles, and software in the year purchased — instead of depreciating over 5–7 years. 2025 limits, the SUV cap, and what California doesn't conform to.

Deal structure

Asset Sale vs Stock Sale: What Business Owners Actually Pay

A plain-English comparison of how each structure taxes the same exit — and why buyers and sellers usually want opposite things.

Estimate

How Much Tax Will I Pay Selling My Business?

A walkthrough of the inputs that decide the bill — entity type, asset vs stock, basis, state residency, and deal terms.

Frequently asked

Questions owners actually ask

Does depreciation recapture apply even if I sold the asset at a loss?: If you sell an asset for less than its adjusted basis (original cost minus total depreciation taken), you have a loss — not recapture. Recapture only applies when you sell at a gain above the adjusted basis. However, if you took Section 179 or bonus depreciation and the adjusted basis is $0, even a modest sale price is all gain — and all of that gain up to the original cost is subject to recapture.
Can I avoid depreciation recapture with a 1031 exchange?: Yes — a 1031 like-kind exchange defers both the capital gain and the depreciation recapture by rolling the basis into a replacement property. The deferred recapture carries over to the new property. When you eventually sell the replacement property without a 1031 exchange, recapture becomes due. 1031 exchanges only apply to real property (post-2017 TCJA — personal property no longer qualifies).
Does recapture apply when the asset is fully depreciated?: Yes — and it's the entire gain up to the original cost basis. If you bought equipment for $50,000, depreciated it fully to $0 adjusted basis, and sell it for $20,000, the entire $20,000 is Section 1245 recapture taxed at ordinary income rates. There's no long-term capital gain portion because the gain doesn't exceed the original cost.
How does recapture affect the calculation when selling a business?: In an asset sale, each asset category is taxed separately based on its character. Equipment and vehicles sold above adjusted basis trigger Section 1245 recapture at ordinary rates. Real property triggers Section 1250 recapture at 25%. Goodwill and customer relationships are generally capital gain. This is why the allocation of purchase price in a business sale significantly affects total tax — buyers and sellers often want to allocate differently.
What happens to recapture in a stock sale vs asset sale?: In a pure stock sale (selling S-corp or C-corp shares), the seller has only capital gain on the stock — no asset-level recapture because the assets aren't technically being sold; ownership of the entity is changing. This is one reason sellers prefer stock sales. In an asset sale, each asset is sold individually, and recapture applies to each depreciable asset at the entity level.

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Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.