What is the amount of cost recovery deductions that must be recaptured after Maxwell sold his computer?

In order to determine the correct amount of cost recovery deductions that must be recaptured after the sale of an asset like a computer, it is crucial to understand the concept of depreciation recapture. When an asset is sold, any gain attributable to the depreciation taken on that asset must be recaptured and reported as ordinary income.

If Maxwell sold the computer for an amount greater than its adjusted basis (which is typically its original cost minus any accumulated depreciation), the amount of depreciation that exceeds the adjusted basis must be recaptured.

In this case, the recapture amount typically equals the lesser of the total depreciation taken or the gain realized on the sale. The correct answer indicates that $1,392 is the amount that Maxwell has to recapture. This implies that this amount corresponds either to the total depreciation he claimed on that asset or is the portion of gain due to prior depreciation that is taxed as ordinary income, adhering to the tax laws governing asset depreciation and recapture.

It's noteworthy that if the gain from the sale does not exceed the depreciation taken, then the recapture amount aligns closely with the depreciation claimed. Conversely, if there were no depreciation taken or if the sale resulted in a loss, the recapture would be zero, which would not apply in