What is depreciation recapture when selling a business?
Direct answer
Depreciation recapture is the tax you pay on the depreciation you claimed while owning an asset. When a senior housing community sells, depreciation on furniture, fixtures and equipment is recaptured as ordinary income in the year of sale. A 1031 exchange does not defer it.
What to know
During ownership, depreciation lowers your taxable income. At sale, the IRS takes some of that benefit back by taxing the recaptured amount. For a community sale, the recapture applies to the FF&E portion of the price allocation, and it is taxed as ordinary income rather than at capital gain rates.
Because recapture follows the allocation, the purchase price allocation on IRS Form 8594 matters twice: it sets how much gain your 1031 exchange can defer on the real estate, and how much ordinary income the FF&E recapture creates. Model the tax with your CPA before you agree to an allocation.
This is general information, not tax, legal or investment advice. Talk to your CPA and attorney about your situation.
How Haven helps
Haven coordinates with sellers' CPAs on allocation questions so the tax treatment of a sale is understood before closing. Read our 1031 exchange guide for senior housing.