adjusted basis the amounts the taxpayer depreciated. If a taxpayer sells an asset for less than its basis, then the taxpayer has taken a loss. If the taxpayer sells the asset for more than its basis, the taxpayer has experienced a gain. For example, if a taxpayer purchased a widget for $1,000, the original basis of the widget would be $1,000. If the taxpayer sold the widget for $1,500, the taxpayer would experience a capital gain of $500. Depreciation When a taxpayer purchases a tax-deductible asset for use over several years, the taxpayer can deduct a percentage of the asset's value from their yearly taxable income over the life of the asset. (See IRC § 167, 168 and the IRS tables of class lives and recovery periods). The IRS publishes specific depreciation schedules for different classes of assets. The schedules tell a taxpayer what percentage of an asset's value may be deducted each year and the number of years in which the deductions may be taken. The values of these deductions are used to determine the asset's recomputed basis at the time the taxpayer sells the asset. (See IRC § 1245(a)(2)(A)). For example, if a taxpayer purchased a widget with a $1,000 basis, then deducted $100 from their ordinary income each year for the widget's depreciation, after four years the widget's adjusted basis would be $600. The accumulated depreciation on the widget during that time is $400. Computing depreciation recapture When a taxpayer sells an asset for a gain after taking deductions for depreciation, depreciation recapture is used to tax the gain. Because the taxpayer received a deduction from ordinary income for the depreciation of the asset, any gain the taxpayer receives, up to the depreciation amount, must be included as ordinary income to offset the earlier deduction. Any gain above that is a capital gain subject to capital gains tax rates (usually more favorable). For example, the widget discussed above had an original basis of $1,000. The taxpayer took $400 worth of depreciation deductions from their ordinary income over the course of four years. At the end of those four years, the taxpayer's adjusted basis in the asset had changed to $600. If the taxpayer then sells the asset for $700, then they would realize a gain of $100. Because they received depreciation deductions, they would be required to include the $100 gain as part of their ordinary income.