Section 1245 property is generally depreciable personal property and certain other business property whose gain can be recaptured as ordinary income when sold.
Section 1245 property is generally depreciable personal property and certain other business property subject to section 1245 recapture rules. In plain language, it is the part of the business-property sale system where prior depreciation can pull gain back into ordinary income more aggressively than many taxpayers expect.
Section 1245 matters because it explains why a sale of equipment, machinery, vehicles, or similar depreciated business property may not leave much or any gain in long-term capital-gain treatment. The recapture rule can convert gain up to prior depreciation into ordinary income.
It also matters because this is one of the clearest places where Depreciation Recapture becomes concrete. IRS Publication 544 explains that gain on the disposition of section 1245 property is recaptured as ordinary income to the extent of depreciation or amortization allowed or allowable.
| Term | Main idea | Why it is different |
|---|---|---|
| Section 1245 property | Generally depreciable personal property and certain other business property | Its gain is often recaptured as ordinary income up to prior depreciation |
| Section 1231 Property | Broad category for certain business property held more than one year | Section 1245 is a narrower property type whose recapture rules are applied before any remaining section 1231 treatment |
| Section 1250 Property | Generally depreciable real property | Section 1250 is the real-property branch, while section 1245 is usually the personal-property branch |
| Depreciation Recapture | Rule that can convert gain into ordinary income | Section 1245 is one of the main property classifications where recapture is measured |
| Form 4797 | Main form for business-property sales and recapture | Form 4797 is where section 1245 sale results are reported |
Section 1245 property appears when a taxpayer sells depreciated business property such as equipment, furniture, machinery, or certain vehicles. IRS Publication 544 says that section 1245 property generally includes depreciable personal property and certain amortizable intangibles. The taxpayer starts with original cost, computes Adjusted Basis, determines the realized gain, and then measures how much of that gain must be treated as ordinary income under the section 1245 recapture rules. That reporting usually runs through Form 4797.
If there is gain beyond the recapture amount and the property otherwise qualifies, the remaining gain can continue into the Section 1231 Property framework.
A business buys equipment for $40,000 and later claims $25,000 of depreciation. The equipment is then sold for an amount that produces gain over adjusted basis. That gain is not automatically treated as long-term capital gain. Under the section 1245 rules, gain up to the prior depreciation amount can be treated as ordinary income first.
Section 1245 property is not just any business asset. It is a defined property class, and the recapture result depends on both the property type and the depreciation history.
It is also not the same as Section 1250 Property. Section 1245 usually deals with depreciable personal property and similar assets, while section 1250 generally deals with depreciable real property.
It is also different from the broader Capital Gain concept. A profitable sale may still exist, but section 1245 determines how much of that gain is recharacterized as ordinary income because of prior depreciation.