How does depreciation recapture work when you sell Section 1245 property for a loss? Real example with numbers
So I'm trying to figure out this whole depreciation recapture thing and I'm getting pretty confused. Let me give you a specific example of what I'm dealing with. I purchased some equipment for my small business about 3 years ago for $26,500. Over time, I've taken depreciation deductions totaling about $13,200. Now I'm looking to sell this equipment, but the market value has tanked and I can only get around $6,800 for it. What I'm trying to understand is: do I still have to pay taxes on that $13,200 of depreciation I already claimed, even though I'm selling at a loss? Does Section 1245 property recapture still apply when you're taking an overall loss on the asset? I tried reading the IRS publications but honestly got more confused. Anyone have experience with this who can explain it in simple terms?
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Zoe Papadopoulos
The answer is no, you don't have to recapture all the depreciation when you sell at a loss below the adjusted basis. Here's what's happening in your example: Original cost: $26,500 Depreciation taken: $13,200 Adjusted basis: $13,300 ($26,500 - $13,200) Sale price: $6,800 Since you're selling below your adjusted basis of $13,300, there's no gain to recapture. Instead, you have a loss of $6,500 ($13,300 - $6,800). This is considered an ordinary loss for business property, which you can deduct against your ordinary income. Depreciation recapture under Section 1245 only applies when you sell the property for more than its adjusted basis but not necessarily more than the original purchase price. If you had sold the equipment for $15,000 (above adjusted basis but below original cost), then you would have had to recapture the gain of $1,700 ($15,000 - $13,300) as ordinary income.
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Jamal Washington
•Wait I'm confused now. I thought ANY depreciation you claimed has to be recaptured when you sell, regardless of whether you sell at a gain or loss? Isn't that the whole point of recapture - the IRS getting back what you deducted before?
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Zoe Papadopoulos
•No, that's a common misconception. Depreciation recapture only applies when you sell the asset for more than its adjusted basis. If you sell for less than the adjusted basis, you have a deductible loss, not recapture income. The concept of "recapture" is specifically about converting what would otherwise be capital gain into ordinary income, up to the amount of depreciation previously taken. But if there's no gain at all (as in your case where you're selling below adjusted basis), there's nothing to recapture.
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Mei Wong
After dealing with a similar Section 1245 property situation last year, I found https://taxr.ai incredibly helpful for clarifying depreciation recapture rules. I had a scenario with equipment I sold at a loss and wasn't sure about the tax implications. The website analyzed my situation by reviewing all my documentation and previous tax filings. It correctly identified that I didn't need to recapture depreciation when selling below adjusted basis and saved me from overpaying on my taxes.
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Liam Fitzgerald
•How exactly does taxr.ai work? Does it just give general advice or does it actually look at your specific numbers and documentation? I'm dealing with several equipment sales this year and some were gains, some losses.
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PixelWarrior
•I've heard about AI tax tools but I'm skeptical about trusting complex tax situations to them. How confident were you in the advice it gave you compared to what a CPA might say?
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Mei Wong
•It goes beyond general advice by analyzing your specific documents and numbers. You upload your previous tax returns, asset purchase records, and depreciation schedules, and it gives you personalized guidance based on your exact situation. For your mix of equipment sales, it would separately analyze each transaction. I was initially skeptical too, but the analysis it provided matched exactly what my CPA later confirmed. The difference was I got answers immediately rather than waiting two weeks for my accountant to get back to me during busy season. The explanations were detailed and included specific references to relevant tax codes. My CPA was actually impressed with the accuracy.
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PixelWarrior
I need to follow up about my experience with taxr.ai after posting my skeptical comment. I decided to try it with my manufacturing equipment sales situation (some sold at gains, others at losses). The system correctly identified which sales triggered recapture and which resulted in deductible losses. It even flagged that one of my assets was incorrectly classified in previous tax years! The guidance was spot-on and helped me avoid a $3,700 mistake on my return. Definitely worth checking out if you're dealing with Section 1245 property sales.
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Amara Adebayo
I was in an almost identical situation with selling Section 1245 property last year. After spending HOURS on hold trying to get clarification from the IRS about the recapture rules, I finally found https://claimyr.com and used their service to get connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what the top commenter said - when you sell below adjusted basis, there's no recapture. She also explained that my loss would be considered an ordinary loss (not capital) since it was business equipment. Saved me so much stress wondering if I was filing correctly.
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Giovanni Rossi
•Wait, so this service actually gets you through to a real IRS person? How is that even possible when I've been trying for weeks? Is there some catch I'm missing?
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Fatima Al-Mansour
•Sorry but this sounds like BS. Nobody gets through to the IRS that quickly. I'd be very skeptical of any service claiming they can do that. Probably just connecting you to some random "tax expert" who gives generic advice.
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Amara Adebayo
•Yes, it connects you with an actual IRS representative. They use a technology that navigates the IRS phone system and waits on hold for you. When an agent picks up, you get a call connecting you directly to that person. I verified it was legitimate by checking the official IRS phone number they were calling. The service doesn't provide tax advice themselves - they literally just get you past the hold time to speak with real IRS employees. I had the same skepticism initially, but was desperate after waiting on hold for over 3 hours myself. I can confirm it was definitely an official IRS agent who answered my questions about Section 1245 recapture rules.
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Fatima Al-Mansour
I need to eat my words from my previous comment. After struggling with this exact depreciation recapture question for weeks and getting nowhere with the IRS phone line, I tried Claimyr out of desperation. Got connected to an actual IRS agent in about 15 minutes who sorted out my confusion. The agent walked me through my specific situation with equipment sold at a loss and confirmed I didn't need to recapture the depreciation. Also clarified how to properly report it on my return. Can't believe I wasted so many hours on hold before finding this.
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Dylan Evans
Just to add another real example: I had a backhoe purchased for $50,000, depreciated $27,000, then sold for $18,000. My adjusted basis was $23,000, so I had a $5,000 loss. My tax guy explained this is an ordinary loss since it's Section 1245 property used in business. The trick is understanding what "adjusted basis" means - it's your original cost minus the depreciation you've already taken. Only when you sell above that adjusted basis do you have to worry about recapture.
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Sofia Gomez
•Is there any difference in how this works if the equipment was used partially for business and partially for personal use? For example, a vehicle that was 70% business use?
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Dylan Evans
•When equipment has mixed use (business and personal), you need to allocate any gain or loss based on the business-use percentage. For a vehicle with 70% business use, you would only depreciate 70% of the cost basis originally. Then when selling, you'd calculate gain/loss on the business portion separately. Let's say you bought a truck for $30,000, with 70% business use. You'd only depreciate $21,000 of the cost. If you claimed $10,000 in depreciation and sold it for $15,000, you'd have to look at the business portion of the sale ($15,000 × 70% = $10,500). Your adjusted basis for the business portion would be $11,000 ($21,000 - $10,000), so you'd have a $500 ordinary loss on the business portion. The personal portion would be calculated separately.
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StormChaser
Important note that I learned the hard way: How you CLAIMED the depreciation matters, not just how you COULD HAVE claimed it. If you took accelerated depreciation under MACRS or Section 179 expensing, the recapture rules still apply to what you actually deducted. In your example, even tho your selling at a loss overall, make sure your keeping good records of exactly what depreciation method you used and how much you claimed each year.
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Dmitry Petrov
•Does the type of software used for calculating depreciation matter? I've been using QuickBooks and wondering if I should trust their calculations for my equipment sales.
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