Is depreciation recapture due in the year of sale?

The rule

Installment reporting spreads gain over the years you receive payments, but depreciation recapture does not get spread. The publication says to figure the recapture income, including recapture of the section 179 and section 179A deductions, in Part III of Form 4797 and to report it in Part II of Form 4797 as ordinary income in the year of sale. The recapture income is also included in Part I of Form 6252, but the gain equal to the recapture income is reported in full in the year of the sale. Only the gain greater than the recapture income is reported on the installment method. For the recapture rules themselves, the publication refers to chapter 3 of Publication 544.

How recapture enters the gross profit percentage

Worksheet A adds depreciation recapture as line 4, alongside your adjusted basis and selling expenses, to arrive at the adjusted basis for installment sale purposes. The publication explains that the recapture income reported in the year of sale is included in your installment sale basis when you determine gross profit. The effect is that recapture shrinks the gross profit that is deferred, so the portion taxed immediately and the portion spread over the payments do not overlap.

This also answers the common question about ordinary income in an installment sale: the part of the gain that is depreciation recapture is ordinary, taxed in the year of sale; the rest keeps the character it would have had anyway. The publication says an installment sale of business or rental property can produce a capital gain, an ordinary gain, or both, and that all or part of the gain may be ordinary gain from depreciation recapture.

An illustration

The following example is ours, built with the publication's rules; the publication does not print a recapture example. Say business property with an adjusted basis of $40,000 sells for $100,000, and $15,000 of the gain is depreciation recapture. Installment sale basis is $40,000 plus $15,000, or $55,000, so gross profit is $45,000 and, with no mortgage, the percentage is 45%. Your down payment is $20,000. In the year of sale you report $15,000 of recapture as ordinary income, plus 45% of $20,000, or $9,000, as installment sale income, for $24,000 in all. Later payments carry 45% each. Total gain across the years is $60,000, the same as without the installment method. Enter 100,000, 40,000, 0, 15,000 and 20,000 above to see it.

Where each piece is reported

For trade or business property held more than one year, the publication says to enter the amount from line 26 of Form 6252 on Form 4797, line 4. If the property was held one year or less, or you have ordinary gain from a noncapital asset even when held longer, enter the amount on Form 4797, line 10, and write "From Form 6252." Personal-use property goes on Schedule D (Form 1040). Our depreciation recapture calculator estimates the recapture amount and tax for a sale, and the installment sale tax calculator lays out the later years.

What counts as depreciable property here

The publication's wording is broad: property for which you claimed or could have claimed a depreciation deduction. "Could have claimed" matters, because depreciation that was allowed or allowable reduces your basis whether or not you took it. Equipment, buildings and other business or rental property are the usual cases, and a personal-use asset such as your own home generally falls outside because no depreciation deduction was available on it. The recapture figure itself is found on Form 4797, Part III, so complete that form before Form 6252. If you are unsure how much of your gain is recapture, work through Form 4797 first and then enter the result in the calculator above.

Planning cautions

Because recapture lands in the year of sale, an installment sale can leave you with a large ordinary-income bill in a year when you have received little cash. That is a cash flow issue to plan for, since the installment method cannot defer that part. Electing out is another option; see the election page.

Sources

• IRS Publication 537, Installment Sales (2025): Depreciation Recapture Income; Worksheet A line 4; Reporting an Installment Sale: Form 4797. Read November 2, 2026.

Edition read: Publication 537 (2025), for use in preparing 2025 returns. Dollar thresholds on this page are the figures printed in that edition; check the current publication, Form 6252 and its instructions for your tax year. This page summarizes the publication and does not replace it.