Is Bonus Depreciation Subject to Recapture? Triggers and Rules

Yes, bonus depreciation is subject to recapture. Every dollar you write off through bonus depreciation reduces the asset’s tax basis, and when you later sell or dispose of the property, the IRS reclaims those deductions by taxing the resulting gain as ordinary income rather than at capital gains rates. For most business equipment, that means a rate as high as 37% on the recaptured portion. With 100% bonus depreciation restored on a permanent basis for property acquired and placed in service after January 19, 2025, the recapture exposure on fully expensed assets is now as large as it has ever been.¹

Why Bonus Depreciation Feeds Recapture

Bonus depreciation accelerates deductions that would otherwise be spread over years. Each deduction lowers the asset’s adjusted basis, which is your remaining investment in the property for tax purposes. Fully expense a $100,000 machine in the year you buy it and the basis drops to zero, even though the machine still has real market value.

Sell later for more than that basis and the difference is gain. The tax code refuses to let you deduct at ordinary income rates and then pay lower capital gains rates on the same dollars when the property changes hands. Recapture closes that gap by reclassifying gain up to the amount of depreciation you claimed as ordinary income. The bigger and faster the deduction, the larger the recapture waiting on the other end.

A 100% write-off zeroes the basis immediately. Buy a $200,000 piece of equipment, deduct the full cost, sell three years later for $80,000, and every penny of that $80,000 is taxable gain. Under the earlier phase-down schedule (80%, 60%, 40%, and 20%), some basis would have remained to absorb part of the sale price. Permanent full expensing means permanent maximum recapture.

Section 1245 Recapture on Equipment

Section 1245 governs tangible personal property used in a business: machinery, vehicles, manufacturing equipment, office furniture, single-purpose agricultural structures, and similar assets.² The recapture rule here is absolute. Gain on sale is ordinary income up to the total depreciation claimed. There is no 25% cap, no preferential rate, no carve-out.

The statutory formula is a “lesser of” test. Ordinary income equals the smaller of: total depreciation taken, or the gain realized on the sale. Two scenarios on a $100,000 machine fully expensed to a zero basis:

Sale for $40,000. Gain is $40,000. Depreciation claimed was $100,000. The lesser figure, $40,000, is ordinary income.
Sale for $110,000. Gain is $110,000. Depreciation was $100,000. The $100,000 is ordinary income. The remaining $10,000 is a Section 1231 gain, eligible for capital gains treatment if your Section 1231 gains exceed your losses for the year.³

Even that capital gains sliver has a catch. If you posted net Section 1231 losses in any of the five preceding tax years, current Section 1231 gains are recharacterized as ordinary income to the extent of those prior losses before any capital gains rate applies.³ The calculation runs through Form 4797.⁴

Section 1250 Recapture on Real Property

Depreciated real property (commercial buildings, qualified improvement property, certain land improvements) falls under Section 1250.⁵ Straight-line depreciation on real estate generates “unrecaptured Section 1250 gain” on sale, taxed at a maximum rate of 25%. That is above the ordinary 15% or 20% long-term capital gains rates but well below the top ordinary bracket.

Bonus depreciation changes the picture. Depreciation in excess of what straight-line would have produced is “additional depreciation” under Section 1250, and the applicable percentage of that excess is recaptured as ordinary income, not at the 25% cap.⁵ Owners who assume the 25% ceiling applies to their entire depreciation history often face a much larger bill than they planned for.

The Cost Segregation Angle

Cost segregation studies split a building into components and reclassify some of them (specialized wiring, decorative finishes, removable fixtures) from Section 1250 real property into Section 1245 personal property. That reclassification accelerates deductions upfront. It also changes the recapture character. Components that would have been capped at 25% as building depreciation now face full ordinary income recapture at rates up to 37% when the building sells. A $500,000 reclassification saves tax now and costs tax later, and the “later” number is often larger.

Events That Trigger Recapture

A cash sale is the obvious trigger, but several other events force recapture and catch owners off guard.

Conversion to Personal Use

Take a business asset and start using it personally and the IRS treats the conversion as a disposition. Recapture is calculated on the asset’s fair market value at the time of conversion minus its adjusted basis. No cash needs to change hands.

Listed Property Falling Below 50% Business Use

Passenger automobiles, other transportation vehicles, and property typically used for entertainment or recreation are “listed property” under Section 280F.⁶ If you claimed bonus depreciation on listed property and business use later drops to 50% or below in any tax year, you owe recapture on the excess: the difference between what you deducted and what you would have deducted under the slower Alternative Depreciation System. Remaining depreciation switches to that slower method going forward. The recapture is reported on Form 4797.⁴ If you fully expensed a vehicle, keep meticulous mileage logs. Losing the majority even once is enough.

Involuntary Conversions

Insurance payouts, condemnation awards, and similar proceeds trigger recapture to the extent they exceed the asset’s adjusted basis. A zero-basis machine destroyed in a fire and paid out at $60,000 produces $60,000 of recapture income.

Like-Kind Exchanges No Longer Help for Equipment

Section 1031 used to let you defer recapture by swapping one piece of equipment for a similar one. The Tax Cuts and Jobs Act eliminated that for personal property. Since January 1, 2018, Section 1031 applies only to real property.⁷ Exchanging machinery, vehicles, or any other tangible personal property now triggers full recapture no matter how similar the replacement. Real estate exchanges still work, but any cash or non-like-kind property received (boot) triggers recapture to that extent.

The Installment Sale Trap

Spreading a sale across an installment note does not spread the recapture. Section 453(i) requires all depreciation recapture income to be recognized in the year of sale, regardless of when the cash arrives.⁸ Sell fully depreciated equipment for $300,000 on a five-year note and you owe tax on the full $300,000 in Year 1 even if you have collected only the first installment. Only gain above the recapture amount qualifies for installment reporting.⁹ Model the Year 1 tax liability before signing.

Death and Gifts Behave Differently

Two common non-sale transfers land on opposite sides of the recapture line.

Inherited property gets a stepped-up basis equal to fair market value on the date of death under Section 1014, which wipes out accumulated depreciation for recapture purposes.¹⁰ A building the prior owner depreciated to a $50,000 basis but worth $400,000 at death gives the heir a fresh $400,000 basis. The prior depreciation vanishes from the tax picture. This is a significant reason some owners hold heavily depreciated property rather than sell.

Gifts do the opposite. The recipient takes a carryover basis under Section 1015 along with the full depreciation history.¹¹ Gift a zero-basis machine and the recipient’s basis is zero. When they sell, they owe the recapture the donor would have owed. Gifting shifts the liability; it does not erase it.

Offsetting Recapture With NOLs

Because recapture is ordinary income, it can be absorbed by net operating loss carryforwards. Under Section 172, NOLs from tax years beginning after 2017 can offset up to 80% of taxable income in a given year.¹² Pre-2018 NOLs are not subject to that cap. Even with a large loss carryforward, post-2017 NOLs cannot zero out a large recapture event completely in one year, leaving at least 20% of the recapture income exposed.

State Conformity Is a Separate Calculation

Federal is not the whole bill. Many states decouple from federal bonus depreciation, either by conforming to an older version of the Internal Revenue Code or by requiring their own schedule. A business that took 100% federally may have been forced onto a slower state method, leaving a higher state basis. When the asset sells, federal and state recapture numbers can diverge significantly. Check your state’s conformity status before estimating the total tax cost.

1
Internal Revenue Service. One, Big, Beautiful Bill Provisions
2
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
3
Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions
4
Internal Revenue Service. Instructions for Form 4797 (2025)
5
Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty
6
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles
7
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
8
Office of the Law Revision Counsel. 26 US Code 453 – Installment Method
9
Internal Revenue Service. Publication 537 (2025), Installment Sales
10
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
11
Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
12
Office of the Law Revision Counsel. 26 US Code 172 – Net Operating Loss Deduction