Section 1245 Property

Definition of Section 1245 Property

Section 1245 property is a category of property as defined by the Internal Revenue Code (IRC) that constitutes depreciable personal property. It refers to gains resulting from the sale or disposition of Section 1245 property, which includes furniture, machinery, vehicles, and other types of tangible personal property on which depreciation deductions have been claimed. According to Section 1245, the portion of the gain up to the amount of previously claimed depreciation must be recaptured and taxed as ordinary income, while the remaining gain may be subject to the favorable capital gains tax rate.

Examples

Office Furniture: A company sells office furniture that it has been depreciating over several years. Upon selling the furniture, the portion of the gain equivalent to the depreciated amount is taxed as ordinary income.
Machinery and Equipment: A manufacturer disposes of an old production machine, realizing a gain on the sale. Section 1245 requires that the depreciation recapture be taxed as ordinary income, and any excess gain be taxed at the capital gains rate.
Vehicles: A business sells a delivery truck that has been fully depreciated for tax purposes. The gain on the sale must recapture the depreciation and be taxed as ordinary income according to Section 1245.

Frequently Asked Questions

Q1: What types of property fall under Section 1245?

Objects such as fixtures, machinery, equipment, vehicles, and computers that a business uses and has depreciated for tax purposes.

Q2: How does depreciation recapture work under Section 1245?

When Section 1245 property is sold at a gain, the portion of the gain equal to the aggregate depreciation deductions previously taken is recaptured. This recaptured gain is taxed as ordinary income.

Q3: Can Section 1245 property ever not trigger a recapture of depreciation?

If the property is sold at a loss, Section 1245 recapture does not apply because there is no gain to be recaptured.

Q4: What is the difference between Section 1245 property and Section 1250 property?

Section 1245 property relates to tangible personal property and non-residential real property depreciable using the straight-line method, while Section 1250 pertains to gains recapture from the sale of depreciable real property (also known as real estate), such as buildings.

Q5: How does Section 1245 impact the overall tax liability when selling a depreciated asset?

Section 1245 results in part of the gain from the sale of depreciated property being taxed at the higher ordinary income rates rather than the lower capital gains rate.

Depreciation Recapture: A tax provision requiring the portion of the gain equivalent allowed depreciation be taxed as ordinary income upon the sale of an asset.

Capital Gains Tax: A tax on the profit from the sale of property or of an investment which is subject to different rates for short-term and long-term investment periods.

Ordinary Income: Generally encompasses any type of income including wages, salaries, tips and includes the recaptured depreciation as stipulated by IRC for Section 1245 property.

Personal Property: Tangible assets owned by an individual or a business excluding real estate.

Section 1250 Property: A classification under IRC concerning real estate and its related depreciation recapture rules.

Online Resources

References

Publication 946: How to Depreciate Property – Internal Revenue Service (IRS)
Tax Guide 2023 – J.K. Lasser

Suggested Books for Further Study

“Taxation of Business Property” by Lancelot Dane - A comprehensive review of tax treatments related to business assets, including Section 1245 property.
“U.S. Master Depreciation Guide” by CCH Tax Law - Detailed insights into depreciation rules and regulations under U.S. tax law.
“Federal Taxation: Comprehensive Topics” by James W. Pratt and William N. Kulsrud - An in-depth study of comprehensive tax topics including depreciation and Section 1245 properties.

Real Estate Basics: Section 1245 Fundamentals Quiz

### What type of property does Section 1245 apply to? - [x] Depreciable personal property - [ ] Real estate - [ ] Non-depreciable assets - [ ] Intangible property > **Explanation:** Section 1245 specifically applies to depreciable personal property such as machinery, equipment, and vehicles. ### How are gains taxed under Section 1245? - [ ] As tax-free income - [x] As ordinary income and capital gains - [ ] Only as capital gains - [ ] As earned income > **Explanation:** Gains under Section 1245 are taxed as ordinary income to the extent of depreciation recaptured, with any excess gain possibly taxed at the capital gains rate. ### What happens when Section 1245 property is sold at a loss? - [ ] Depreciation is recaptured - [ ] Taxes are increased - [x] No recapture applies - [ ] Taxes are deferred > **Explanation:** If the property is sold at a loss, then there is no gain to recapture, hence no Section 1245 recapture applies. ### What must be reclaimed as ordinary income when selling Section 1245 property? - [ ] Original cost of the property - [ ] Sales price - [x] Depreciation taken - [ ] Entire capital gain > **Explanation:** When selling Section 1245 property, the amount of depreciation deductions previously claimed must be recaptured and is taxed as ordinary income. ### What is an example of Section 1245 property? - [ ] Residential real estate - [x] Office furniture - [ ] Farmland - [ ] Land improvements > **Explanation:** Office furniture is a common example of Section 1245 property since it is tangible personal property subject to depreciation. ### Which tax rate generally applies to the recaptured depreciation under Section 1245? - [ ] Preferential tax rate - [x] Ordinary income tax rate - [ ] Long-term capital gains tax rate - [ ] Estate tax rate > **Explanation:** The portion of the gain equivalent to the previously claimed depreciation is taxed at ordinary income tax rates. ### How does the classification between Section 1245 and Section 1250 impact taxation? - [ ] Both have the same impact - [ ] No impact at all - [x] Affects whether gain is considered capital or ordinary income - [ ] Depends on property location > **Explanation:** The classification impacts whether the gain is treated as ordinary income (for Section 1245) or as capital gain with partial recapture of depreciation (for Section 1250). ### Does Section 1245 apply to land itself? - [ ] Yes - [x] No - [ ] Sometimes - [ ] Only in agricultural contexts > **Explanation:** Section 1245 applies specifically to depreciable personal property, not land. ### Which property type is taxed under Section 1245 upon sale if depreciation had been claimed? - [x] Depreciable personal property - [ ] Main residential homes - [ ] Non-depreciated property - [ ] Investments > **Explanation:** Depreciable personal property where depreciation has been claimed is subject to the rules of Section 1245 upon sale. ### When is Section 1245 gain partially treated as capital gain? - [ ] Never - [x] Only once depreciation recapture limit is exceeded - [ ] Always - [ ] Based on IRS discretion > **Explanation:** Once the depreciated portion has been recaptured as ordinary income, any remaining gain on Section 1245 property may be treated as a capital gain.