Question

DQ Wk5 Q1

Explain Congress's rationale for depreciation recapture.

Answer 1

The objective of depreciation recapture is to treat the profit on the sale of depreciable assets as normThe purpose of depreciation recapture is to treat the gain on the sale of depreciable assets as normal income. The MACRS system allows accelerated deductions that often reduce the basis of an asset faster than the real economic deterioration in value. Thus, depreciation deductions generate an artificial gain on the disposition of depreciable assets. The recapture rules ensure that some or all of the artificial gain is characterized as ordinary similar to the depreciation deductions that created the artificial gain. It is important to note that depreciation recapture does not affect the amount of the gain; rather it affects only the nature of the gain. Additionally, depreciation recapture applies to sales or dispositions resulting in gains/ income to the extent the gain is attributable to depreciation (or other cost recovery deductions).