Depreciation Recapture: What Happens When You Sell Business Assets

You bought a laptop for your freelance business, deducted the full cost under Section 179, and moved on. Two years later you sell it. That sale proceeds check feels like free money, but it is not. The IRS wants a piece of it, and not at the favorable capital gains rate. It is taxed as ordinary income.

This is depreciation recapture, and it catches a lot of self-employed taxpayers off guard.

How Depreciation Recapture Works

When you depreciate a business asset (or deduct it all at once through Section 179 or bonus depreciation), you reduce your taxable income in the years you claim those deductions. Your adjusted basis in the asset drops by the amount of depreciation taken. If you deducted the full cost, your basis goes to zero.

When you later sell that asset for more than your adjusted basis, the IRS does not simply tax the difference as a capital gain. Instead, it "recaptures" the depreciation you previously claimed and taxes that portion as ordinary income, at your regular tax rate. The logic is straightforward: you got an ordinary income deduction when you claimed the depreciation, so the IRS wants ordinary income tax back when you reverse it by selling.

The specific rules depend on what type of property you sold.

Section 1245 Property: Equipment, Vehicles, and Electronics

Most assets freelancers deal with fall under Section 1245. This includes computers, laptops, cameras, office furniture, machinery, vehicles, and most other tangible personal property used in business.

The rule for Section 1245 property is simple and aggressive: all depreciation recapture is taxed as ordinary income, up to the total amount of depreciation you claimed. There is no special reduced rate. If you depreciated $5,000 and sell the asset for $5,000 or more, you have $5,000 of ordinary income from recapture.

If you sell the asset for more than its original cost, the gain above original cost is treated as a Section 1231 gain, which is taxed at capital gains rates. But for most freelancers selling used equipment, this scenario is uncommon. Used laptops and office furniture rarely appreciate.

Section 1250 Property: Buildings and Real Property

Real property (buildings, commercial structures, rental property improvements) falls under Section 1250 and gets different treatment.

For Section 1250 property, only the excess depreciation above what straight-line depreciation would have produced is recaptured as ordinary income. Since most real property placed in service after 1986 is required to use straight-line depreciation, there is often little or no "excess" depreciation to recapture under Section 1250 itself.

However, there is a separate category called unrecaptured Section 1250 gain. The remaining depreciation that was claimed on real property (the straight-line portion) is taxed at a maximum rate of 25%, which is higher than the long-term capital gains rate of 15% or 20% but lower than the top ordinary income rate.

Any gain above the original cost of the property is taxed at regular long-term capital gains rates.

For most freelancers, Section 1250 recapture comes into play only if you own commercial real estate or a building used in your business. If you are working from a home office, you are not selling the building, so recapture on real property is less common in practice.

A Practical Example: The Freelancer's Laptop

Say you bought a $5,000 laptop for your business and deducted the full $5,000 using Section 179 in year one. Your adjusted basis is now $0.

Scenario 1: You sell the laptop two years later for $2,000. The entire $2,000 is ordinary income from depreciation recapture. You previously deducted $5,000, and the recapture applies up to the lesser of the gain or the depreciation taken. Your gain is $2,000 (sale price minus $0 basis), all of which falls within the $5,000 of depreciation you claimed. So all $2,000 is ordinary income.

Scenario 2: You sell the laptop for $6,000. Now your gain is $6,000 ($6,000 minus $0 basis). The first $5,000 is ordinary income from depreciation recapture (matching the full depreciation claimed). The remaining $1,000 (the amount above your original $5,000 cost) is a Section 1231 gain, taxed at capital gains rates.

Scenario 3: You throw the laptop away or donate it. If you dispose of the asset for nothing, there is no gain and no recapture. But you also cannot claim an additional loss, since your basis is already zero.

Vehicles: Recapture Applies Here Too

If you used the actual expense method for your business vehicle and claimed depreciation deductions over the years, selling or trading in the vehicle triggers depreciation recapture under Section 1245. The total depreciation you claimed becomes potential ordinary income on the sale.

What surprises many taxpayers is that recapture also applies if you used the standard mileage rate. The IRS treats standard mileage rate users as having claimed "deemed depreciation" on the vehicle. For 2025, the deemed depreciation component is 31 cents per mile (out of the 70-cent total rate). Even though you never filled out a depreciation schedule, the IRS calculates what your depreciation "would have been" and recaptures it on sale.

If you drove 15,000 business miles per year for three years, your deemed depreciation is 45,000 miles times $0.31, which equals $13,950. If you then sell the car for more than its adjusted basis (original cost minus deemed depreciation), the gain up to $13,950 is ordinary income from recapture.

How to Avoid Surprises

Keep records of all depreciation claimed. Every Section 179 deduction, every year of MACRS depreciation, every vehicle depreciation amount (actual or deemed) should be tracked. You need these figures when you eventually sell, trade, or dispose of the asset.

Factor recapture into sale decisions. Before selling a fully depreciated asset, calculate the tax hit. A $3,000 sale that generates $3,000 of ordinary income could cost you $660 to $1,110 in federal tax alone (at 22% to 37% rates), plus self-employment tax if it is reported on Schedule C.

Consider installment sales for large assets. If you are selling a high-value asset with significant recapture, an installment sale under Section 453 lets you spread the income (and tax) over multiple years as you receive payments. Note that for Section 1245 property, all recapture income is recognized in the year of sale regardless of installment treatment, but the remaining gain can be spread out.

Do not let recapture stop you from claiming legitimate deductions. The Section 179 deduction or depreciation is still valuable. Getting a $5,000 deduction today and paying tax on $2,000 of recapture three years later is a net win. The time value of the deferred tax alone makes it worthwhile. Just plan for the eventual sale.

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WriteOff tracks the depreciation and Section 179 deductions you have claimed on business assets, so when it is time to sell, you know exactly what recapture to expect.

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Sources

• IRC Section 1245 - Depreciation recapture rules for personal property
• IRC Section 1250 - Depreciation recapture rules for real property
• IRS Publication 544: Sales and Other Dispositions of Assets - Comprehensive guide to asset sale taxation including recapture
• IRS Publication 946: How to Depreciate Property - Depreciation methods and recapture calculations

Section 1245 recapture taxes all prior depreciation as ordinary income on sale. Section 1250 recapture applies only to excess depreciation above straight-line, with remaining depreciation taxed at a maximum 25% rate. Source: IRC § 1245, IRC § 1250.