What is depreciation recapture?

• A. Tax on previously claimed depreciation deductions when property is sold
• B. Tax credit for energy-efficient improvements
• C. Tax deduction for maintenance expenses
• D. Tax on current depreciation deductions only

Answer: (A)

Depreciation recapture is the tax that comes due when you sell a property you’ve depreciated. It taxes the depreciation deductions you claimed in prior years, by treating that portion of your gain as if it were ordinary income up to a maximum rate (for real estate, 25%). The rest of the gain, beyond the amount of depreciation claimed, is taxed as a capital gain at the applicable long-term rate. In short, you’re paying taxes again on the benefit you previously received from depreciation when you dispose of the property. This isn’t a tax credit for energy improvements, nor a deduction for maintenance, and it isn’t a tax on current depreciation deductions alone.