Recapture arises when depreciable property is disposed of for more than the undepreciated capital cost of its class. The excess, up to the property's original capital cost, is added back to income as ordinary income in the year of disposition, on the theory that the capital cost allowance previously claimed was greater than the actual decline in value.
Recapture can substantially exceed any apparent capital gain. For example, a property bought for $100,000 with an undepreciated balance of $50,000 and sold for $80,000 produces $30,000 of recapture and no capital gain, while a sale for $120,000 produces $50,000 of recapture plus a $20,000 capital gain. Recapture is a common and sometimes overlooked consequence when selling rental real estate or business equipment.