How does depreciation recapture work when selling Section 1245 property for a loss?

The confusion around Section 1245 property depreciation recapture is pretty common, so don't worry! Let me clear this up for you. When you sell Section 1245 property (like business equipment) at a loss, you don't have to recapture depreciation as ordinary income. In your case, you bought equipment for $27,000, claimed $13,500 in depreciation, and are selling for $6,700. Your adjusted basis is $13,500 ($27,000 - $13,500), and you're selling for $6,700, so you have a recognized loss of $6,800 ($13,500 - $6,700). This is treated as an ordinary loss on your tax return, not a recapture of depreciation. Depreciation recapture only happens when you sell for more than your adjusted basis. If you had sold for $15,000 (above your $13,500 adjusted basis), then $1,500 would be recaptured as ordinary income, but since you're selling at a loss, there's no recapture.

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A small detail that hasn't been mentioned: If you claimed bonus depreciation or Section 179 on that equipment (which accelerates depreciation), the rules work the same way as regular depreciation. You only have recapture if you sell above adjusted basis. In my business, we deal with equipment sales regularly, and the key is keeping extremely good records of your original purchase price, all depreciation taken (including bonus/Section 179), and the final sale price. This makes tax time much easier.

Does anyone know if tax software like TurboTax handles Section 1245 property sales correctly? I'm in a similar situation as the original poster but with about $31,000 of equipment I depreciated around $16,000 and need to sell for maybe $9,000-ish.

Just to add another perspective here - I went through this exact scenario last year with some manufacturing equipment. The key thing that helped me understand it was thinking about depreciation recapture as only applying to the "gain" portion of a sale. In your case, you have an adjusted basis of $13,500 ($27,000 original cost minus $13,500 depreciation taken). Since you're selling for $6,700, which is below your adjusted basis, there's literally no gain to recapture. The $6,800 difference ($13,500 - $6,700) becomes an ordinary business loss that you can deduct. Your buddy might be thinking of situations where people sell equipment for more than the depreciated value but less than the original purchase price. That's when you get into partial recapture scenarios. But in a straight loss situation like yours, no recapture applies. Make sure you keep all your depreciation schedules and purchase records handy when you file - you'll need them to properly complete Form 4797 for the asset sale.