Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation deductions.
For example, assuming a depreciation recapture rate of 25%, if an investor claimed $100,000 in aggregate depreciation allowance over the holding period of an investment property, then upon sale of the asset, the investor may be subject to $25,000 in depreciation recapture tax. However, as with capital gains taxes, depreciation recapture may be deferred by via a 1031 exchange.
