Selling Business Equipment: Depreciation Recapture, Gain Calculations, and Tax Implications
When a business sells equipment that was previously depreciated, the tax treatment depends on the relationship between the sale price and the equipment’s adjusted basis (original cost minus accumulated depreciation). Under IRC 1245, any gain on the sale is treated as ordinary income to the extent of prior depreciation deductions (this is “depreciation recapture”). Only gain exceeding the total depreciation taken is treated as capital gain (rare for personal property, since equipment rarely sells for more than its original cost). This rule applies whether the equipment was depreciated using MACRS, Section 179, or bonus depreciation. If Section 179 or 100% bonus depreciation was used, the entire cost was deducted in Year 1, the adjusted basis is $0, and the full sale price becomes ordinary income on the return.
Depreciation recapture rules (IRC 1245):
The formula:
- Sale price: what you received
- Adjusted basis: original cost minus accumulated depreciation
- Gain: sale price minus adjusted basis
- Depreciation recapture: the lesser of (a) total depreciation taken or (b) the gain
- The recaptured amount is ordinary income (taxed at your regular rate, not capital gains rates)
Three scenarios:
| Scenario | Sale Price vs. Basis | Tax Treatment |
|---|---|---|
| Sale price > adjusted basis, but < original cost | All gain is depreciation recapture (ordinary income) | Most common |
| Sale price > original cost | Depreciation recapture (ordinary) up to total depreciation + capital gain above original cost | Rare for equipment |
| Sale price < adjusted basis | Loss (deductible as ordinary loss, IRC 1231) | Equipment sold at distress prices |
Section 179 and bonus depreciation impact:
| Depreciation Method | Year 1 Deduction | Adjusted Basis After Year 1 | Sale in Year 3 at 50% of Cost |
|---|---|---|---|
| MACRS (5-year) | 20% of cost | 80% of cost (after Year 1), ~43% (after Year 3) | Gain = 50% - 43% = 7% of cost (ordinary) |
| Section 179 | 100% of cost | $0 | Gain = 50% of cost (ALL ordinary income) |
| Bonus (100%) | 100% of cost | $0 | Gain = 50% of cost (ALL ordinary income) |
The tax “payback” on Section 179/bonus depreciation: the upfront deduction saves taxes when the equipment is purchased, but the full sale price becomes taxable ordinary income when sold. The net benefit depends on how long you keep the equipment and your tax bracket at purchase vs. sale.
IRC 1231 (gains and losses on business property):
- Net IRC 1231 gains: treated as long-term capital gains (lower rate)
- Net IRC 1231 losses: treated as ordinary losses (fully deductible)
- BUT: depreciation recapture under IRC 1245 converts gain back to ordinary income first
- Capital gain treatment only applies to the portion of gain exceeding total depreciation (extremely rare for equipment)
- The practical result: almost all equipment sale gains are ordinary income
What happens when you sell depreciated equipment?
Should a plumber use 179 or bonus on a replacement van?
For a plumbing contractor, the van’s weight can matter more than the method. A van rated at 6,000 pounds or less is generally a passenger automobile, so its first-year depreciation is capped at $20,200 for 2025 or $20,300 for 2026 when bonus applies. Above that line those caps drop away, though Section 179 on an SUV-type vehicle up to 14,000 pounds is limited to $31,300 for 2025 or $32,000 for 2026.
Either way, the van needs more than 50% business use in the year it’s placed in service. Between the two methods, bonus is the default (100% for vans acquired after January 19, 2025) and isn’t capped by income. In an S corp, Section 179 runs through two sets of limits, at the company and on your own return, and it can’t exceed your taxable income from active trades or businesses.
Can I offset capital gains with capital losses from other investments?
Yes. Capital losses first offset capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then any remaining net loss offsets gains of the other type. If net capital losses exceed capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely to future tax years, maintaining their character (short-term or long-term). The wash sale rule (IRC 1091) prevents you from claiming a loss if you repurchase substantially identical securities within 30 days before or after the sale. Tax-loss harvesting before year-end is a common strategy to realize losses that offset gains elsewhere in the portfolio.
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Yarik Yarosh, CPA. "Selling Business Equipment: Depreciation Recapture, Gain Calculations, and Tax Implications." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-selling-equipment-mid-year-tax-implications
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.