Depreciation recapture (Section 1245)
Depreciation recapture treats gain on the sale of depreciated business equipment as ordinary income, up to the depreciation taken. It stops taxpayers turning ordinary deductions into lower-taxed capital gain.
Section 1245 covers personal property such as machines and vehicles. Real property falls under Section 1250, where individuals pay up to 25% on the unrecaptured depreciation.
Example. A machine cost $100,000 and $60,000 of depreciation was taken. Selling it for $70,000 gives $30,000 of gain, all ordinary income under Section 1245.
By Binod Raj Singh, CPA (licensed in Montana) · Updated for the 2026-2027 exam windows · Last updated 2026-11-05