Depreciation Recapture When Selling Business Assets: Section 1245, 1250, and the Tax Bill at Sale

By Yarik Yarosh, CPA ·September 5, 2026 ·4 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Depreciation recapture is the tax you pay when you sell a business asset for more than its depreciated (adjusted) basis. The IRS essentially “takes back” the tax benefit of the depreciation deductions you claimed while you owned the asset. The recapture rules differ depending on whether the asset is personal property (equipment, vehicles, furniture) under IRC 1245 or real property (buildings) under IRC 1250.

✓Key takeaway

Section 1245 property (equipment, vehicles, furniture, machinery): All depreciation is recaptured as ORDINARY INCOME, up to the amount of gain on the sale. This includes depreciation taken under Section 179 and bonus depreciation. If a business owner expensed a $60,000 vehicle under Section 179 in Year 1 and sells it for $30,000 in Year 3, the $30,000 is ordinary income (not capital gain).

Section 1250 property (buildings, structures): Depreciation is recaptured at a maximum rate of 25% (the “unrecaptured Section 1250 gain” rate). Any gain above the original cost is taxed at long-term capital gains rates (0%, 15%, or 20%).

The practical impact: Businesses that aggressively used Section 179 or bonus depreciation to write off equipment in Year 1 face ordinary income recapture if they sell the equipment before it would have been fully depreciated under straight-line. The tax savings on the front end are partially reversed on the back end. This doesn’t mean Section 179 is a bad strategy. The time value of money (getting the deduction now and paying the recapture later) still favors accelerated depreciation.

Other events that trigger recapture, not just a sale:

Converting a business asset to personal use triggers recapture (the FMV at the date of conversion is treated as the “sale price”)
Like-kind exchanges under IRC 1031 defer recapture, but only on real property (personal property no longer qualifies after the Tax Cuts and Jobs Act)
Installment sales spread the cash collection over multiple years, but the recapture portion is recognized as income in the year of sale, regardless of when the payments are actually received

How does depreciation recapture work for vehicles?

Hypothetical example

Round numbers. A business owner purchases a $50,000 SUV (over 6,000 lbs GVWR) and deducts the full $50,000 under Section 179 in Year 1.

Year 3: Sells the SUV for $30,000.

Original cost: $50,000
Depreciation taken: $50,000 (Section 179)
Adjusted basis: $0
Sale price: $30,000
Gain: $30,000
Recapture (ordinary income): $30,000

The $30,000 is taxed as ordinary income at the owner’s marginal rate (e.g., 24% = $7,200 tax). Depreciation recapture isn’t subject to self-employment tax (it isn’t earned income from a trade or business), even if it flows through a sole proprietorship or partnership. This is a common misconception.

Compare to no Section 179 (5-year MACRS):

Year 1-3 depreciation (approximately): $40,000
Adjusted basis at Year 3: $10,000
Gain on sale: $30,000 - $10,000 = $20,000
Recapture: $20,000

Without Section 179, the recapture is $10,000 less because less depreciation was taken. However, the business also received $10,000 less in deductions during Years 1-3. The net tax position is similar, but with Section 179, the deductions were concentrated in Year 1 (better cash flow).

Illustrative numbers only, not a real client and not advice for your facts.

What about trading in equipment?

When a business trades in equipment (e.g., trades an old vehicle for a new one at a dealership), the trade-in is treated as a sale for tax purposes. The trade-in value becomes the sale price, and depreciation recapture applies. The remaining adjusted basis of the old equipment rolls into the new equipment’s basis.

A business owner trading in a fully depreciated ($0 basis) vehicle worth $15,000 on a $50,000 new vehicle has $15,000 in depreciation recapture on the trade-in and a $35,000 cash payment toward the new vehicle. The new vehicle’s depreciable basis is $50,000 ($35,000 cash + $15,000 trade-in value).

Note: the like-kind exchange rules under IRC 1031 do NOT apply to personal property (vehicles, equipment) after the Tax Cuts and Jobs Act. Like-kind exchanges are now limited to real property.

What about real property (buildings)?

Hypothetical example

Round numbers. A business owner bought a commercial building for $400,000 (excluding land). After 10 years of straight-line depreciation ($400,000 / 39 years x 10 = $102,564 in total depreciation), the adjusted basis is $297,436. The owner sells for $500,000.

Tax treatment:

Gain: $500,000 - $297,436 = $202,564
Unrecaptured Section 1250 gain (depreciation taken): $102,564 (taxed at 25%)
Remaining gain: $202,564 - $102,564 = $100,000 (taxed at 20% capital gains rate)
Tax: ($102,564 x 25%) + ($100,000 x 20%) = $25,641 + $20,000 = $45,641
Plus NIIT: $202,564 x 3.8% = $7,697
Total tax: $53,338

If the owner does a 1031 exchange instead: $0 tax (deferred until the replacement property is sold). If held until death, the heirs receive a stepped-up basis under IRC 1014, eliminating the recapture entirely.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Depreciation Recapture When Selling Business Assets: Section 1245, 1250, and the Tax Bill at Sale." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-depreciation-recapture

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.