How to Avoid Depreciation Recapture

by James Collins ; Updated July 27, 2017
Taxpayers must use caution to avoid depreciation recapture.

Assets that contribute to income generation for a business must be depreciated over time. This is the accountant's way of accounting for the wear and tear of assets over time. As the asset is used, the amount calculated as depreciation is expensed every year until the entire value of the asset is written off. The new value of the asset is referred to as the new book value, and the book value decreases every year. Depreciation recapture is when an asset is sold for more than its current book value. Taxes must be assessed on this gain.

Step 1

Obtain the current book value of the asset. The book value of the asset is the value of the asset after depreciation expense. For instance, if a tractor has a book value of $5,000 after five years of depreciation, this is the new value of the tractor.

Step 2

Review the calculation for depreciation recapture. Depreciation recapture is assessed on any portion of the gain made on the sale on depreciated assets. The calculation is sales price minus the depreciable base where depreciable base is the current book value of the asset. This means the best way to avoid depreciation recapture is to always sell your asset at or below its current book value.

Step 3

Avoid depreciation recapture on the sale of assets. Do not sell the asset for more than its current book value. For example, if you want to avoid depreciation recapture on a tractor that has a current book value of $5,000, then you need to sell it for $5,000 or less.

About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.

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