Oregon Tax Consultants Practice Exam

What does recapture refer to in tax terms?

1. The loss of tax deductions due to sale of property

2. The repayment of government loans

3. The amount of depreciation or deduction that must be reported as income when property is sold at a gain

4. The process of claiming back overstated taxes

The correct answer is: The amount of depreciation or deduction that must be reported as income when property is sold at a gain

Recapture in tax terms specifically refers to the scenario in which a taxpayer must report previously deducted amounts as income when they sell an asset for more than its adjusted basis. This often occurs with depreciation or other deductions claimed on property. When an asset that has appreciated in value is sold, the Internal Revenue Code requires taxpayers to recapture the depreciation taken, resulting in a taxable amount. The rationale is that the deductions provided a tax benefit during ownership, and when the asset is sold at a gain, those deductions are effectively reversed up to the amount of gain realized. Thus, the correct interpretation of recapture aligns with the idea that the taxpayer must report the depreciation or deduction as income, correcting the tax treatment for taxpayers who benefited from the deductions during the holding period. The other options do not accurately describe recapture. The loss of tax deductions due to the sale of property is more of a consequence rather than the definition of recapture; repayment of government loans does not fall under tax recapture; and the process of claiming back overstated taxes relates to tax refunds or adjustments, which is fundamentally different from the concept of recapturing previously taken deductions.