Capital Gains and Losses - Depreciation Recapture - Asset Disposal

If you used an accelerated method of depreciation, any gain you have on the sale attributable to this depreciation must be recaptured and reported as ordinary income.

If you used straight-line depreciation you may not have to report any recapture as ordinary income, but any gain computed would be considered capital gain income. 

You must report the full amount of depreciation, allowed or allowable, up to the date of disposal when reporting the asset’s disposal on the Federal Form 4797, in order to compute the correct amount of gain. 

The gain is computed on Lines 20 thru 24 of Form 4797. Any depreciation you have claimed in the past reduces your basis and thus would increase your gain when you sell it. The entries for the disposal will be reported on Federal Form 4797, Part III. An amount on Line 31 of this form would represent ordinary income recapture. An amount on Line 32 will be treated as capital gain income. 

To review Form 4797 and Schedule D:

  1. Click Tools to expand the menu, then click Forms Assistant
  2. Expand the Federal Forms and Schedules folder and browse to Form 4797
  1. Click Forms on the top toolbar
  2. Expand the Federal Forms and Schedules folder and browse to Form 4797