Depreciation recapture, and the prior-year figures it reaches back for

An asset is sold. The gain looks straightforward until you reach the part of the calculation that is not about this year at all — the part that asks what depreciation was taken on that asset over its entire life, and in what form.

If the client has been with you since the asset was placed in service, that history is in your own file. If they arrived three years ago with a PDF from another firm, the history is whatever that PDF happened to print.

Recapture is where the quality of an inherited depreciation schedule stops being an administrative matter and becomes a number on a return.

Recapture is a characterisation rule, not a second tax

The mechanism is worth stating precisely, because the word suggests something is being clawed back and that is not quite what happens.

Depreciation reduces basis. A lower basis produces a larger gain on sale. Recapture does not create that gain — it decides how part of it is characterised. To the extent of depreciation taken, the gain is treated as ordinary income rather than capital gain, and the disposal is reported on Form 4797.

So recapture is a rule about which bucket the gain falls into, and the size of the bucket is set by the depreciation history. That history is the input the current year's return does not contain.

§1245 and §1250 divide the world differently

The two recapture regimes apply to different property and behave differently.

§1245 property — machinery, equipment, furniture, vehicles, most tangible personal property, and certain other property. On disposal, gain is recaptured as ordinary income to the extent of depreciation allowed or allowable. In practice this is the aggressive one: it reaches the full depreciation figure, not a portion of it.

§1250 property — buildings and their structural components. Here the ordinary-income recapture reaches only additional depreciation, meaning depreciation claimed in excess of what straight line would have produced. Because MACRS depreciates residential rental and nonresidential real property on a straight-line basis, that excess is frequently zero on property placed in service after 1986, and §1250 recapture with it.

That is not the end of the story for real property, and the part people miss is the next one: unrecaptured §1250 gain under §1(h)(1)(E). Gain attributable to straight-line depreciation on §1250 property is not ordinary income, but it is taxed at a maximum rate of 25% rather than the ordinary capital gains rate. It is a rate rule rather than a characterisation rule, and it is also driven by accumulated depreciation.

Both regimes, then, read the same input from the schedule and use it differently.

"Allowed or allowable" is the phrase that does the work

The statute does not ask what depreciation was claimed. It asks about depreciation allowed or allowable.

Allowable means the depreciation that could properly have been taken, whether or not anyone took it. A prior preparer who under-depreciated an asset does not thereby reduce recapture on its sale — the basis reduction is computed on what was allowable, and the gain follows.

Two consequences for a preparer holding an inherited schedule.

The prior schedule is evidence of what was claimed, which is the starting point but not automatically the answer. And a schedule that is internally inconsistent — a life that does not match the method, a prior figure that does not reconcile to the years elapsed — is a signal worth resolving before it becomes a disposal calculation, rather than after.

The components a combined prior figure hides

Here is where the printed schedule stops being interchangeable with the client file, and it is the part of this subject that is genuinely under-documented.

Many schedules print one prior depreciation figure. Some print its components separately: prior regular depreciation, prior §179 expense, prior special depreciation allowance. Lacerte's summary variant is the common example of the first kind, and the components are not zero on it — they are absent from the page.

For a straightforward §1245 sale, the combined figure is sufficient. Recapture there is measured against total depreciation allowed or allowable, and the total is exactly what a combined column carries.

Four situations need the split.

§179 recapture on a business-use drop. Under §179(d)(10), the §179 deduction is recaptured when qualified business use of the property falls to 50% or below before the end of the recovery period. The amount at stake is computed from the §179 that was actually taken, which a combined prior figure does not disclose.

Listed property. §280F(b)(2) applies a similar recapture where business use of listed property falls to 50% or less, again measured against amounts that a combined figure does not separate.

State conformity. Many states decouple from federal bonus depreciation, so state basis differs from federal basis by the bonus taken. Reconstructing the state position on a disposal requires the bonus component on its own.

§1250 property with a mixed history. Where additional depreciation exists, the split between straight-line and everything else is the whole §1250 computation.

The uncomfortable property of all four is that they surface on disposal — years after the schedule was transcribed, on a return prepared by whoever holds the client then.

Zero is a claim, not a blank

This is the specific failure worth naming, because it is invisible at the moment it happens.

An import file has a column for prior §179 and a column for prior bonus. The schedule in front of you does not print them. Zero is the obvious thing to type, and every import will accept it.

But zero is an assertion. It states that no §179 and no bonus were ever claimed on that asset. If they were, the assertion is false, and its falseness is stored quietly in the fixed asset system until a disposal or a business-use change asks the question — at which point the recapture computed from it is wrong, and nothing in the file indicates why.

An empty field, marked as not present in the source, preserves the one fact you actually possess: that the document did not say. It is less tidy, and it is the only option that does not manufacture information. The Lacerte summary schedule guide goes through what preparers do about the gap, including the routes for recovering the components from the prior firm.

What to check on a schedule you inherited

Two minutes, at the desk, before the assets are keyed anywhere.

Look at the column headers, not the totals. Separate columns for prior §179 and prior special depreciation allowance mean you have the detail. One prior depreciation column with no siblings means the components are not on the page.

Check the report title. A client file prints federal, AMT, book, state and next-year variants that carry the same assets with different figures, and each one foots correctly against its own totals. An AMT copy transcribed by mistake produces an internally consistent schedule of the wrong numbers.

Tie the rows to the printed subtotals. Cost, prior depreciation and current depreciation, per group and in grand total, at a dollar's tolerance for the rounding printed schedules use. This is the only independent check available on whether the transcription is faithful, and it is the one that catches a dropped or duplicated asset — the kind of error that silently changes a basis.

Note what is missing rather than filling it. A field the schedule did not print is a question for the prior firm, and the prior firm still has the client file even when they only sent you a printout.

What we do with it

This tool transcribes a printed schedule into the import format the destination accepts. It does not compute recapture, does not decide a method or a life, and does not reconstruct a component the page omitted.

When a summary variant is detected, prior §179 and prior bonus come back empty and flagged as not present in the source, and that flag blocks the download until a preparer clears it deliberately. That is the whole reason the flag exists: writing zero there would be a silent claim about a disposal years away, and the honest output is a gap you can see.

The tie-out runs first regardless — printed totals against summed rows, per activity and in grand total — so the figures that feed a future recapture calculation are at least the figures the document actually printed. For the mechanics of getting an inherited schedule into your own system, see the prior year depreciation schedule for a new client.

FAQ

What is depreciation recapture in plain terms?

It is a characterisation rule applied on disposal. Depreciation reduces basis and so increases gain; recapture treats part of that gain as ordinary income rather than capital gain, to the extent of depreciation taken. It is reported on Form 4797.

What is the difference between §1245 and §1250 recapture?

§1245 applies to tangible personal property and recaptures gain as ordinary income to the extent of depreciation allowed or allowable. §1250 applies to buildings and reaches only additional depreciation — the excess over straight line — which is often zero for property placed in service after 1986 because MACRS depreciates real property straight-line.

What is unrecaptured §1250 gain?

Gain on §1250 property attributable to straight-line depreciation. It is not ordinary income, but under §1(h)(1)(E) it carries a maximum rate of 25% rather than the ordinary capital gains rate.

Does it matter that a prior preparer took less depreciation than they could have?

The measure is depreciation allowed or allowable, so depreciation that could properly have been taken counts whether or not it was claimed. An inherited schedule showing less than the allowable amount is worth resolving before a disposal rather than during one.

Can I enter zero for prior §179 and prior bonus if the schedule does not show them?

Zero states that neither was claimed, which is a different statement from the document being silent. Whether that distinction changes a particular return depends on facts the schedule does not contain — but it is the input to §179 recapture on a business-use drop and to state basis where the state decouples from bonus.

Where do the components come from if the printout does not have them?

The prior firm's client file still holds them, so the detailed schedule or a fixed-asset export is the first request. Prior years' Forms 4562 report §179 and special depreciation allowance for the year claimed, which is a slower second route.