Legal Definitions - recapture

Recapture refers to the government's process of recovering a tax benefit that was previously granted to an individual or business. This recovery occurs when the specific conditions or qualifications for that tax benefit are no longer met, or when an asset that received beneficial tax treatment is disposed of prematurely.

Essentially, if you received a tax break based on certain assumptions or requirements, and those assumptions or requirements change, the government may "recapture" the value of that tax break, requiring you to pay back some or all of the tax savings you initially enjoyed.

• Example 1: Depreciation of Business Property

  Imagine a small manufacturing company purchases new machinery for its factory. Under tax law, they are allowed to deduct a portion of the machinery's cost each year as depreciation, which reduces their taxable income. This is a significant tax benefit. However, if the company decides to sell that machinery after only two years, much sooner than its expected useful life for tax purposes, the government might "recapture" some of the depreciation deductions. This means a portion of the sale proceeds, equivalent to the previously deducted depreciation, would be treated as taxable income, effectively taking back the tax savings the company received from those early deductions.

• Example 2: Energy-Efficient Home Improvement Tax Credit

  Consider a homeowner who installs solar panels on their roof and receives a federal tax credit for making an energy-efficient improvement. This credit directly reduces their tax liability. A condition for this credit might be that the homeowner must reside in the home for a minimum number of years, perhaps five. If the homeowner unexpectedly sells the house after only three years, the government could "recapture" a portion of that tax credit. This would require the homeowner to pay back some of the tax savings they originally received because they did not meet the full ownership period requirement.