What is CCA recapture?

When a depreciable fixed asset is sold, its capital cost allowance (CCA) class is reduced by deducting the lower of its original cost, or its proceeds of sale. This gain is referred to as a “recapture” of CCA, and must be included in business or property income for the year.

What does recapture mean in accounting?

In tax accounting, recapture is the process of adjusting taxable income higher due to certain deductions made in the previous period.

How do you account for depreciation recapture?

You could then determine the asset’s depreciation recapture value by subtracting the adjusted cost basis from the asset’s sale price. If you bought equipment for $30,000 and the IRS assigned you a 15% deduction rate with a deduction period of four years, your cost basis is $30,000.

Is depreciation recapture the same as capital gains?

A capital gain occurs when an asset is sold for more than its original cost basis. When an asset is sold for more than the book value but less than the basis, the amount over book value is called depreciation recapture and is treated as ordinary income in that year.

How is recapture calculated?

Start with your UCC in any class and add the amount you spent on new property in the class. Then, subtract the proceeds you earned from the disposition of property in that class.

Is recapture a capital gain?

This recaptured amount will be treated as ordinary income when taxes are filed for the year. The additional $2,000 is treated as a capital gain, and it is taxed at the favorable capital gains rate. There is no depreciation to recapture if a loss was realized on the sale of a depreciated asset.

What are the recapture rules?

Recapture rules for personal property. If you have a capital gain on any depreciable personal property other than real estate, you must report all or part of the gain as ordinary income to reflect the amount of depreciation, and any first-year expensing deductions that were claimed on the asset.

Can you avoid depreciation recapture?

Luckily, you can avoid depreciation recapture tax on a rental property. One of the best methods is to use a 1031 exchange. Using a 1031 exchange enables investors to defer most, if not all, of their depreciation recapture tax, not to mention their capital gains tax.

Can I avoid depreciation recapture?

What triggers depreciation recapture?

Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus “recaptured” by reporting it as ordinary income. Depreciation recapture is reported on Internal Revenue Service (IRS) Form 4797.

How do you avoid paying depreciation recapture?

Is depreciation recapture passive income?

Can those passive losses be used to offset the depreciation recapture tax? The suspended passive losses cannot be used to offset depreciation recapture. But you can fully deduct these suspended passive losses when you sell your rental property in a qualifying disposition.

How do you calculate depreciation recapture?

How to Calculate Depreciation Recapture. Calculate the depreciation that was allowable for all years including the year you sold the asset. Add this back to the basis of the asset, then find the difference between the selling price and the basis. Examine the depreciation that was allowed, including in the year of disposal.

What does it mean to “recapture depreciation”?

Depreciation recapture is the gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis.

When do I have to recapture depreciation on rental property?

Depreciation recapture most commonly applies when dealing with the sale of improved real estate (such as rental property), as the value of real estate generally increases over time while the improvements are subject to depreciation.