Depreciation recapture changes the character of the gain on the sale of a section 1231 asset from a section 1231 gain into ordinary income.
Depreciation Recapture: What Is It?
The gain on the sale of a depreciable asset that must be declared as ordinary income for tax purposes is known as depreciation recapture. When an asset's sale price is higher than its tax basis or adjusted cost basis, depreciation recapture is applied.
What guidelines apply to recapture?
Recapture laws prevent taxpayers from benefiting from lower capital gains tax rates on gains that can be attributed to depreciation deductions that were utilised to offset ordinary income. Property described in Section 1245, such as machinery, and property described in Section 1250, such as a building, are subject to different recapture rules.
Section 1231 applies to gains, but does not apply to losses.
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