Use this calculator to estimate the potential tax liability from depreciation recapture and long-term capital gains when selling an asset that has been depreciated.
function calculateDepreciationRecapture() {
var originalBasis = parseFloat(document.getElementById('originalBasis').value);
var sellingPrice = parseFloat(document.getElementById('sellingPrice').value);
var totalDepreciation = parseFloat(document.getElementById('totalDepreciation').value);
var sellingExpenses = parseFloat(document.getElementById('sellingExpenses').value);
var depreciationRecaptureRate = parseFloat(document.getElementById('depreciationRecaptureRate').value) / 100;
var capitalGainsRate = parseFloat(document.getElementById('capitalGainsRate').value) / 100;
if (isNaN(originalBasis) || isNaN(sellingPrice) || isNaN(totalDepreciation) || isNaN(sellingExpenses) || isNaN(depreciationRecaptureRate) || isNaN(capitalGainsRate)) {
alert('Please enter valid numbers for all fields.');
return;
}
// 1. Calculate Adjusted Basis
var adjustedBasis = originalBasis – totalDepreciation;
// 2. Calculate Gross Profit
var grossProfit = sellingPrice – originalBasis;
// 3. Calculate Net Gain (after selling expenses)
var netGain = grossProfit – sellingExpenses;
var depreciationRecaptureAmount = 0;
var longTermCapitalGain = 0;
var taxOnRecapture = 0;
var taxOnCapitalGain = 0;
var totalTaxLiability = 0;
if (netGain > 0) {
// 4. Calculate Depreciation Recapture Amount
// This is the lesser of the total depreciation taken or the net gain on sale.
depreciationRecaptureAmount = Math.min(netGain, totalDepreciation);
// 5. Calculate Long-Term Capital Gain
// This is the portion of the net gain that exceeds the depreciation recapture.
longTermCapitalGain = netGain – depreciationRecaptureAmount;
// 6. Calculate Tax on Depreciation Recapture
taxOnRecapture = depreciationRecaptureAmount * depreciationRecaptureRate;
// 7. Calculate Tax on Long-Term Capital Gain
taxOnCapitalGain = longTermCapitalGain * capitalGainsRate;
// 8. Calculate Total Tax Liability
totalTaxLiability = taxOnRecapture + taxOnCapitalGain;
}
document.getElementById('adjustedBasisResult').innerText = '$' + adjustedBasis.toFixed(2);
document.getElementById('netGainResult').innerText = '$' + netGain.toFixed(2);
document.getElementById('depreciationRecaptureAmountResult').innerText = '$' + depreciationRecaptureAmount.toFixed(2);
document.getElementById('taxOnRecaptureResult').innerText = '$' + taxOnRecapture.toFixed(2);
document.getElementById('longTermCapitalGainResult').innerText = '$' + longTermCapitalGain.toFixed(2);
document.getElementById('taxOnCapitalGainResult').innerText = '$' + taxOnCapitalGain.toFixed(2);
document.getElementById('totalTaxLiabilityResult').innerText = '$' + totalTaxLiability.toFixed(2);
}
// Run calculation on page load with default values
window.onload = calculateDepreciationRecapture;
.depreciation-recapture-calculator {
font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif;
background-color: #f9f9f9;
padding: 25px;
border-radius: 10px;
box-shadow: 0 4px 12px rgba(0, 0, 0, 0.1);
max-width: 700px;
margin: 30px auto;
border: 1px solid #e0e0e0;
}
.depreciation-recapture-calculator h2 {
color: #2c3e50;
text-align: center;
margin-bottom: 20px;
font-size: 26px;
}
.depreciation-recapture-calculator h3 {
color: #34495e;
margin-top: 25px;
margin-bottom: 15px;
font-size: 20px;
border-bottom: 2px solid #ececec;
padding-bottom: 8px;
}
.calculator-inputs label {
display: inline-block;
margin-bottom: 8px;
font-weight: bold;
color: #333;
width: 60%; /* Adjust width for labels */
box-sizing: border-box;
padding-right: 10px;
text-align: right;
}
.calculator-inputs input[type="number"] {
width: 35%; /* Adjust width for inputs */
padding: 10px;
margin-bottom: 15px;
border: 1px solid #ccc;
border-radius: 5px;
box-sizing: border-box;
font-size: 16px;
}
.calculator-inputs button {
display: block;
width: 100%;
padding: 12px 20px;
background-color: #28a745;
color: white;
border: none;
border-radius: 5px;
font-size: 18px;
cursor: pointer;
transition: background-color 0.3s ease;
margin-top: 20px;
}
.calculator-inputs button:hover {
background-color: #218838;
}
.calculator-results p {
font-size: 17px;
margin-bottom: 10px;
color: #333;
line-height: 1.6;
}
.calculator-results p strong {
color: #2c3e50;
min-width: 220px; /* Ensure consistent alignment */
display: inline-block;
}
.calculator-results span {
font-weight: normal;
color: #007bff;
}
@media (max-width: 600px) {
.calculator-inputs label,
.calculator-inputs input[type="number"] {
width: 100%;
text-align: left;
padding-right: 0;
}
}
Understanding Depreciation Recapture
Depreciation recapture is a tax rule that requires taxpayers to pay ordinary income tax rates on gains from the sale of depreciable property, up to the amount of depreciation previously deducted. This rule prevents taxpayers from converting ordinary income (which is taxed at higher rates) into capital gains (which are often taxed at lower rates) by deducting depreciation and then selling the asset for a profit.
How Depreciation Works
When you own an asset used for business or income-producing purposes (like a rental property or business equipment), the IRS allows you to deduct a portion of its cost each year. This deduction, called depreciation, accounts for the asset's wear and tear, obsolescence, or deterioration over time. It reduces your taxable income annually, effectively lowering your tax bill during the asset's useful life.
The Recapture Mechanism
The "recapture" comes into play when you sell that depreciated asset for more than its adjusted basis. The adjusted basis is the original cost of the asset minus the total depreciation you've claimed. If the selling price exceeds this adjusted basis, a portion of that gain, up to the total amount of depreciation taken, is "recaptured" and taxed at a higher rate than long-term capital gains.
For real estate, specifically Section 1250 property, the depreciation recapture rate is typically 25%. Any gain exceeding the recaptured depreciation is then taxed at the applicable long-term capital gains rates (e.g., 0%, 15%, or 20% depending on your income bracket).
Why is it Important?
Understanding depreciation recapture is crucial for financial planning, especially for investors and business owners. It directly impacts the net proceeds you receive from selling an asset. Without accounting for it, you might overestimate your after-tax profit, leading to unexpected tax liabilities.
- Real Estate Investors: When selling a rental property, the depreciation taken over years can significantly reduce the property's adjusted basis. A substantial portion of your profit might be subject to the 25% recapture rate.
- Business Owners: Selling business equipment, vehicles, or machinery that has been depreciated can also trigger recapture rules, affecting the overall profitability of the sale.
Example Scenario: Selling a Rental Property
Let's consider a practical example to illustrate the calculation:
- Original Purchase Price: $500,000
- Selling Price: $650,000
- Total Depreciation Taken: $100,000
- Selling Expenses (commissions, fees): $30,000
- Depreciation Recapture Tax Rate: 25%
- Long-Term Capital Gains Tax Rate: 15%
Using these figures, the calculator would perform the following steps:
- Adjusted Basis: $500,000 (Original Basis) – $100,000 (Total Depreciation) = $400,000
- Gross Profit: $650,000 (Selling Price) – $500,000 (Original Basis) = $150,000
- Net Gain on Sale: $150,000 (Gross Profit) – $30,000 (Selling Expenses) = $120,000
- Depreciation Recapture Amount: The lesser of Net Gain ($120,000) or Total Depreciation Taken ($100,000) = $100,000
- Tax on Depreciation Recapture: $100,000 * 25% = $25,000
- Long-Term Capital Gain: $120,000 (Net Gain) – $100,000 (Recapture Amount) = $20,000
- Tax on Long-Term Capital Gain: $20,000 * 15% = $3,000
- Total Estimated Tax Liability: $25,000 + $3,000 = $28,000
As you can see, a significant portion of the gain is taxed at the higher depreciation recapture rate. This calculator helps you quickly estimate these figures to better plan your finances.