Captured depreciation

Can anyone please help me understand the two concepts:

-Recaptured Depreciation ( I read again and again but unable to get the gist of the concept)

-Sinking fund factor

Thank you

depreciation is meant to represent the reduction in value of your asset as it ages.

if you buy something for (say) $500k, then depreciate it so it’s worth $400k on your books, then sell it for $600k – that depreciation shouldn’t have ‘happened’, because the asset actually gained in value rather than dropped. the depreciation allowed you to reduce your tax bill, so you have to ‘recapture’ that depreciation and pay the tax on it, to make up for this.

The reason for this is that recaptured depreciation will be taxed at the normal income rate, and the capital gain portion will be taxed at a preferrential long term capital gains rate.

So in this example Where the original cost was 500k, then we depreciate to 400k then sell it for 600k. Say our normal tax rate is 30%, and tax rate on Long term capital gains is 15%. So we got to write off 100k in depreciation expense against regular income (30%). So if the IRS didn’t require us to recapture depreciation, we could just call the 200k a capital gain and only pay 15% tax on it. But us being able to depreciate an asset and save 30% on our taxes, then sell it and only pay 15% on what we gain back is extremely beneficial for us.

So in the above example 100k isn’t a true capital gain, and needs to be taxed at 30%, so its called recapturing depreciation and the other 100k is a true capital gain and should be taxed at the 15% rate.

So recaptured depreciation is pretty much just a tax issue then, right?

Great, thanks a lot