What is Recapture?
A recapture occurs when a person or entity takes back anfrom a buyer under certain conditions.
How Does Recapture Work?
Taxing authorities can implement tax recaptures in which the taxing authority requires a taxpayer to pay on previous years of (usually when the taxpayer took a deduction or tax credit that the taxing authority decides was inappropriate).
Recapture clauses are common in commercial real estate. Let's say John Doe owns the ABC Shopping Center. He leases some retail space to Company XYZ. The lease says Company XYZ pay 3% of its to John Doe as rent every month for a minimum of $5,000 per month. In other words, Company XYZ has to have of at least $167,000 a month.
Company XYZ only does $100,000 a month. Because the lease has a recapture clause, John Doe can terminate the lease and take back the retail space from Company XYZ. This allows him to get a better-performing tenant in the space rather than having to suffer through the entire of the lease with a tenant that doesn't generate enough income for him.
Another form of recapture is the depreciation recapture. Let's say John Doe bought a house for $100,000 and ran a business out of it, which allowed him to depreciate the house by $1,000 a . He lived in the house for five years, thus recording $5,000 of depreciation, and then decided to sell the house and move to Tampa. He sold the house for $120,000.
Because the house is a depreciable to John, his on the of the house is based on the depreciated value of the house (that is, $100,000 - $5,000, or $95,000). It is not based on what he paid for the house ($100,000). So, his sale for $120,000 generates a $25,000 profit, not a $20,000 profit. In other words, John must declare a recaptured of $25,000.
Why Does Recapture Matter?
Recaptures are most common in asset exchange takes place and the buyer may want the option to buy back the asset later. And as we've shown, taxing authorities can recapture lost tax when they decide that have not been following the rules.transactions, but they can be in any sort of contract in which an