Oregon Tax Consultants Practice Exam

What types of property are affected by recapture rules?

1. Only real estate properties

2. All depreciable assets sold at a gain

3. Only luxury items and real estate

4. None; recapture rules don’t apply to property

The correct answer is: All depreciable assets sold at a gain

Recapture rules apply to all depreciable assets sold at a gain, making this the correct choice. These rules effectively ensure that any deductions taken for depreciation during the asset's useful life are reversed to some degree upon the sale of the asset. When a depreciable asset is sold for more than its adjusted basis, which includes accumulated depreciation deductions, the IRS requires that the excess be reported as ordinary income, rather than long-term capital gain, up to the amount of depreciation taken. This applies not only to real estate but also to various categories of personal property that can be depreciated, such as machinery, vehicles, and equipment. It’s important to understand the scope of what qualifies as an "asset" under these rules, as they encompass all depreciable properties, ensuring that taxpayers cannot permanently benefit from depreciation deductions without facing tax implications upon the sale of these assets. Other categories, such as luxury items or certain class of properties, do not fit within the broader definition needed to trigger recapture rules, further underscoring that the encompassing category is all depreciable assets.