How to Recapture Depreciation
Depreciation is used by accountants to track the wear and tear of an asset over its useful life. Depreciation is then expensed, or subtracted, from your net income, which can lower the amount you owe to the state or the IRS for taxes. If you decide to sell the property or asset prior to the end of its useful life, you must add the gain to your income if the amount of the sales price exceeds the book value of the asset. This capital gain is referred to as depreciation recapture.
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Instructions
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Determine the purchase price of the asset. For example, if you buy a tractor for $20,000, the purchase price is $20,000.
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Compute the depreciation expense. If the tractor has a useful life of 10 years, the depreciation expense every year is calculated by dividing the purchase price by the useful life. The calculation is $20,000 divided by 10 years equals $2,000. Every year the tractor has $2,000 written off the purchase price as depreciation expense. The new accounting value of the trailer is referred to as the depreciable base.
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Compute the depreciable base or book value of the asset in the year you decide to sell it. If you decide to sell the tractor after five years, that means $10,000 has been written off the initial price of the asset. The depreciable base equals the purchase price minus total depreciation expense. The calculation is $20,000 minus $10,000 equals $10,000.
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Calculate the amount of deprecation you can recapture. Subtract the sales price from the depreciable base. If the tractor sells for $12,000, the difference is $12,000 minus $10,000 equals $2,000. This is the capital gain you must add to your net income in the year the tractor is sold in order to account for depreciation recapture.
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References
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