The basis of an allowance for depreciation is the notion that a taxpayer consumes a portion, but only a portion, of an asset that enables him/her/it to generate income over a period longer than one year. The Code treats that bit of “consumption” the same as any other consumption that enables a taxpayer to generate income, i.e., a deduction from ordinary income. See §§ 162, 212. Such an allowance requires an equal reduction in taxpayer’s basis in the asset. See § 1016(a)(2).
We learn shortly that the Code treats gain upon the sale of most assets subject to depreciation – and therefore not capital assets, § 1222(a)(2) – that taxpayer has held for more than one year as LTCG. This would mean that whatever gain taxpayer realizes that is attributable to basis reductions resulting from deductions for depreciation would be subject to a lower rate of tax than the income against which taxpayer claimed those deductions. 1 The Code addresses this mismatch of character of income and deductions through “depreciation recapture” provisions, i.e., §§ 1245 2 and 1250. 3