Depreciation Recapture: What Happens When You Sell Business Assets
Depreciation recapture is the tax consequence of selling a business asset for more than its depreciated basis (book value). When you take depreciation deductions (including Section 179 and bonus depreciation), you reduce the asset’s basis. If you later sell the asset for more than that reduced basis, the IRS “recaptures” the depreciation by taxing the gain. The recapture is taxed at ordinary income rates (up to 37%) for personal property under IRC 1245. For real property, the depreciation part of the gain (unrecaptured IRC 1250 gain) is taxed at a rate of up to 25%. This applies to depreciated business assets you sell, trade in, or otherwise dispose of at a gain.
Two types of depreciation recapture:
IRC 1245 recapture (personal property: equipment, vehicles, furniture):
- Applies to: equipment, vehicles, computers, furniture, machinery, and most business assets other than buildings
- Rate: ordinary income (up to 37%)
- Amount recaptured: the LESSER of (1) the gain on the sale, or (2) the total depreciation taken (including Section 179 and bonus depreciation)
- Any gain above the total depreciation taken is IRC 1231 gain (taxed at long-term capital gain rates of 0%, 15% or 20% if the asset was held over 1 year and your 1231 gains for the year exceed your 1231 losses, except that net 1231 gain is taxed as ordinary income to the extent of unrecaptured net 1231 losses from the prior 5 years)
IRC 1250 recapture (real property: buildings, improvements):
- Applies to: buildings, building improvements, structural components
- Rate: up to 25% (unrecaptured Section 1250 gain)
- Amount: the depreciation taken on the real property (straight-line depreciation over 27.5 or 39 years)
- Any gain above the total depreciation is taxed as long-term capital gain (0%, 15% or 20%)
- Note: for real property placed in service after 1986, IRC 1250 recapture is generally limited to straight-line depreciation (no excess depreciation to recapture at ordinary rates). The 25% maximum rate applies to the “unrecaptured Section 1250 gain” (the depreciation amount)
Section 179 and bonus depreciation amplify recapture:
- If you took Section 179 or 100% bonus depreciation on a $50,000 heavy vehicle (over 6,000 lbs, so the passenger auto caps don’t apply), your basis is $0
- If you sell the vehicle for $20,000, the ENTIRE $20,000 is depreciation recapture (taxed at ordinary income rates)
- On regular 5-year MACRS instead (no 179 or bonus), a sale after 3 years (in year 4, taking half a year’s depreciation in the year of sale) leaves a basis of about $11,520, so the $20,000 sale still produces about $8,480 of gain, all of it ordinary-income recapture
Self-employment tax on recapture:
- Depreciation recapture on business assets is NOT subject to self-employment tax (it isn’t earned income from a trade or business)
- This is a common misconception. The recapture is taxed as ordinary income for income tax purposes, but not for SE tax purposes
What’s depreciation recapture when selling a vehicle?
Does Section 179 or bonus carry more recapture risk?
On a sale, expensing the full cost with either one takes the asset’s basis to zero, so the sale is taxed the same way. The difference shows up if business use falls. If a Section 179 asset’s business use drops to 50% or less in any year of its recovery period, you may have to recapture the 179 deduction as ordinary income on Form 4797, even though nothing was sold.
Vehicles and other listed property face a stricter version. They need more than 50% business use in the year they’re placed in service to get Section 179 or bonus at all, and if use later drops to 50% or less, the excess depreciation is recaptured. So a truck that drifts toward personal use can trigger recapture long before you sell it.
There’s also a control point. Leaving basis in place takes more than a partial Section 179 election, because bonus applies by default to whatever 179 doesn’t cover. You’d also have to elect out of bonus, and that election covers a whole class of property for the year.
Does using slower MACRS shrink recapture when I sell?
It shrinks the amount recaptured, because more basis is left when you sell, but it also shrinks the tax you save up front. And on qualified property you can’t just pick regular MACRS: bonus depreciation is the default, so you’d have to skip Section 179 and elect out of bonus for the whole class of property that year. That election can be revoked only with IRS consent.
A light work truck is 5-year property, so on regular MACRS it starts at 20% in year one under the half-year convention, and every other 5-year asset you placed in service that year goes on the same schedule. Whether a smaller write-off now is worth less recapture later is a planning call that depends on your tax rate at purchase and at sale. The equipment sale guide runs the same math on a work van.
Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.
One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.
Done. The next guide will land in your inbox.
Yarik Yarosh, CPA. "Depreciation Recapture: What Happens When You Sell Business Assets." Blue Cloud CPA, September 5, 2026, updated October 18, 2026. https://bluecloudcpa.com/guides/small-business-depreciation-recapture-explained
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.