When Do You Recapture MACRS Depreciation?

When Do You Recapture MACRS Depreciation?  This seem to be the “question-du-jour” of
late!  MACRS is Modified Accelerated Cost Recovery System.
IRS logoWhen a commercial property owner disposes of property that was depreciated using MACRS, any gain on the disposition generally is recaptured as ordinary income up to the amount of the depreciation previously allowed or allowable for the property.  MACRS depreciation, for this purpose, includes but is not limited to, the following:
  • Any Section 179 deduction claimed on the property.
  • Any deduction under Section 179C of the Internal Revenue Code for certain qualified refinery property placed in service after August 8, 2005.
  • Any deduction under Section 179D of the Internal Revenue Code for certain energy efficient commercial building property placed in service after December 31, 2005.
  • Any deduction under Section 190 of the Internal Revenue Code for removal of barriers to the disabled and the elderly.
  • Any special depreciation allowance previously allowed or allowable for the property (unless the commercial property owner elected not to claim it).
There is no MACRS recapture for residential rental and non-residential real property unless that property is qualified property for which you claimed a special depreciation allowance.  The IRS provides additional illumination on MACRS depreciation recapture in Publication 544.  If you, as the commercial property owner, dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income.
A gain on the sale or exchange of IRC Section 1245 property is treated as ordinary income to the extent of depreciation allowed, or allowable, on the property.  Any gain recognized that is more than the part that is ordinary income from depreciation is an IRC Section 1231 gain.  Section 1245 property does not include buildings and structural components.  The gain treated as ordinary income on the sale, exchange, or involuntary conversion of Section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts…
  1. The depreciation allowed, or allowable, on the property.
  2. The gain realized on the disposition (the amount realized from the sale or exchange, minus the adjusted basis of the property).
For any other sale, exchange or disposition of Section 1245 property, ordinary income is the lesser of number 1 above, or the amount by which its fair market value is more than it’s adjusted basis.
MACRS depreciation that must be recaptured as ordinary income includes, but is not limited to, the following…
  1. Ordinary depreciation deductions.
  2. Any special depreciation allowance claimed.
  3. Amortization deductions for all the following costs.
    a. Acquiring a lease.
    b. Lessee improvements.
    c. Certified pollution control facilities.
    d. Certain reforestation expenses.
    e. Section 197 intangibles.
    f.  Childcare facility expenses made before 1982, if in effect before the repeal
    of IRC Section 188.
    g. Franchises, trademarks, and trade names acquired before August 11, 1993.
  4. The Section 179 deduction…and there are additional…

Gain on the sale, exchange or disposition of Section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. The recapture of MACRS depreciation happens when the asset is sold, exchanged or changes hands…however, the time-value of money will almost always make using MACRS and cost segregation a wise choice.

 

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