Sections 1245 and 1250 (Depreciation Recapture) recharacterize gain on disposition of depreciable property from capital gain to ORDINARY INCOME (§1245) or to a special maximum 25% rate as "unrecaptured §1250 gain" under §1(h)(1)(D) (§1250). The policy: prevent taxpayers from converting ordinary income deductions (depreciation) into capital gains on sale. §1245 PROPERTY - tangible PERSONAL property used in trade or business and certain real property (§1245(a)(3)) including specially-designated improvement property; recapture is OF FULL DEPRECIATION/AMORTIZATION TAKEN as ordinary income, up to amount of gain on sale. §1250 PROPERTY - depreciable REAL property not included in §1245 (most buildings and structural components). Post-1986 buildings depreciated using mandatory straight-line MACRS - therefore §1250 ordinary recapture often minimal/zero; instead UNRECAPTURED §1250 GAIN under §1(h)(1)(D) - portion of gain attributable to straight-line depreciation - taxed at max 25% federal rate (vs typical 15-20% LTCG). OBBBA NOTICE 2026-11 (issued early 2026) confirmed 100% bonus depreciation PERMANENT for qualified property acquired after January 19, 2025 (P.L. 119-21 §70301); cutoff date replaced original TCJA September 27, 2017. Component election under Notice 2026-11 allows treating individual components of self-constructed property as separately eligible for bonus even if overall project started before January 20, 2025. §168(n) NEW under OBBBA - "qualified production property" treated as §1245 property if designated by taxpayer; placed in service after July 4, 2025; full §1245 recapture treatment on disposition. §179 deduction creates §1245 recapture even on real property components (e.g., qualified leasehold improvement, HVAC, fire protection - 2026 max $2,560,000 with $4,090,000 phaseout). §1031 like-kind exchange defers but does NOT eliminate recapture - preserved in replacement property basis; on ultimate sale recapture extends across multiple exchanged properties. §453 installment sale - §1245 recapture recognized IN YEAR OF SALE (not pro rata) per §453(i)(2); §1250 unrecaptured gain pro rata. §291 (corporate) - 20% of §1245-style recapture for C-corps on §1250 property. §1245 takes PRECEDENCE over §1250 if asset would qualify under both. Form 4797 reports recapture; Part III computes recapture vs §1231 gain; Schedule D for unrecaptured §1250 gain. §199A QBI deduction - §1245 ordinary recapture IS QBI; §1250 unrecaptured gain NOT QBI under §199A(c)(3)(B).
§1245 property: Tangible personal property (machinery, equipment, vehicles, furniture, fixtures); §1245(a)(3)(B) certain real property (qualified production property under §168(n), bulk storage facilities, single-purpose agricultural). Recapture = ALL depreciation/amortization taken, capped at gain. Taxed as ORDINARY INCOME up to 37% (2026).
§1250 property: Depreciable REAL property not §1245 (buildings, structural components). Recapture = "ADDITIONAL depreciation" (accelerated over straight-line) - usually zero post-1986 because MACRS mandates straight-line. Remaining depreciation = "unrecaptured §1250 gain" - max 25% rate under §1(h)(1)(D).
OBBBA changes (P.L. 119-21): 100% bonus depreciation PERMANENT for property acquired after January 19, 2025. §168(n) qualified production property added - treated as §1245. Notice 2026-11 confirms framework.
§179 trap: §179 expensing of real property components (HVAC, roof, fire protection) treated as §1245 property - full recapture as ordinary income on disposition.
§1245 takes precedence: If asset qualifies under both §1245 and §1250, §1245 applies. Cost segregation studies move depreciation to §1245 categories - faster depreciation but higher recapture exposure.
| §1245 Category | Examples |
|---|---|
| Tangible personal property §1245(a)(3)(A) | Machinery, equipment, vehicles, computers, office furniture, fixtures, manufacturing tools |
| Intangible amortizable property | §197 intangibles (goodwill, customer lists, covenants not to compete, patents, copyrights amortized) |
| Real property §1245(a)(3)(B) | Property with adjusted basis reflecting amortization, expensing, or specific deductions: §179, §190 (architectural barriers), §169 (pollution control), §187 (rail rolling stock) |
| Bulk storage facilities | Tanks, silos, similar facilities for fungible commodity bulk storage |
| Single-purpose agricultural structures | Specific-use livestock or horticultural structures |
| Petroleum / mineral storage | Storage and pipeline structures - §1245 since specifically designated |
| Qualified production property §168(n) | NEW under OBBBA (P.L. 119-21) - manufacturing facility property designated and elected; placed in service after July 4, 2025; §1245 treatment |
| Section 179 property | Property for which §179 deduction taken - reclassified as §1245 to extent of §179 expensing; full ordinary income recapture |
| Investment tax credit basis adjustment | Property with basis reduction tied to ITC - treated as depreciation for recapture |
| §1250 Element | Detail |
|---|---|
| Definition §1250(c) | Real property subject to depreciation under §167 that is NOT §1245 property |
| Common examples | Commercial buildings, apartment buildings, residential rental property, hotels, warehouses, structural components (roof, walls, HVAC pre-§179, electrical, plumbing) |
| Recapture base §1250(b) | "Additional depreciation" - excess of depreciation actually claimed over straight-line; usually zero post-1986 because MACRS is mandatory straight-line for §1250 property |
| Recapture rate | Ordinary income (up to 37%) on additional depreciation portion - rarely applies in practice |
| Unrecaptured §1250 gain | Portion of gain attributable to depreciation (whether accelerated or straight-line) NOT recaptured as ordinary; taxed at MAX 25% under §1(h)(1)(D) |
| Bonus depreciation effect | Bonus depreciation on qualified improvement property (QIP) - excess over straight-line creates additional §1250 recapture potential |
| Long-term hold requirement | Recapture only on gain (loss has no recapture); generally property held >1 year for §1250 treatment |
| Death exception §1250(g) | Subsection (a) does not apply to transfer at death (except IRD items) |
| Gift exception §1250(d)(1) | Subsection (a) does not apply to disposition by gift - recapture potential carries over to donee |
Facts: Acme Corp purchased manufacturing equipment for $200,000 on January 1, 2020. Used 100% business use. Took $180,000 total depreciation (combination of bonus depreciation and MACRS). Adjusted basis: $20,000. Sells on December 31, 2025 for $150,000.
Step 1 - Compute gain:
Sale price: $150,000
Adjusted basis: $20,000
Realized gain: $130,000
Step 2 - Identify property class:
Manufacturing equipment - §1245 property (tangible personal property)
Step 3 - §1245 recapture (lesser of gain or depreciation taken):
Depreciation taken: $180,000
Realized gain: $130,000
§1245 recapture = LESSER = $130,000 as ORDINARY INCOME
Step 4 - Remaining gain (if any):
$130,000 gain - $130,000 §1245 recapture = $0 remaining
(If sale price had been higher, e.g., $250,000: gain $230,000; §1245 recapture limited to $180,000 depreciation; remaining $50,000 = §1231 gain → potential LTCG)
Step 5 - Tax effect (assume 35% bracket):
$130,000 × 35% = $45,500 federal tax
State tax additional (CA, NY ordinary rates apply)
NIIT typically does not apply to active business §1245 recapture if not investment income
If instead held in personal §469 passive activity: §1245 recapture is ordinary income, may release suspended passive losses §469(g); careful analysis required.
Facts: Sarah purchased rental apartment building January 1, 2018 for $1,000,000 (excluding land). Residential rental - 27.5 year straight-line MACRS. Sells on December 31, 2025 for $1,500,000. Total depreciation taken: $290,909.
Step 1 - Compute gain:
Sale price (building): $1,500,000
Adjusted basis: $1,000,000 - $290,909 = $709,091
Realized gain: $790,909
Step 2 - §1250 additional depreciation recapture:
Straight-line was used (MACRS mandatory) - additional depreciation = $0
No §1250 ordinary recapture
Step 3 - Unrecaptured §1250 gain (max 25%):
Depreciation taken: $290,909
Gain attributable to depreciation: $290,909 (capped at actual depreciation since gain > depreciation)
Unrecaptured §1250 gain: $290,909 - taxed at max 25%
Step 4 - Remaining gain (LTCG):
Total gain $790,909 - Unrecaptured §1250 gain $290,909 = $500,000 remaining
$500,000 = §1231 gain → if net §1231 gain for year → LTCG
Step 5 - Tax computation (assume top bracket - MFJ income > $613,700):
Unrecaptured §1250 gain: $290,909 × 25% = $72,727
LTCG portion: $500,000 × 20% = $100,000
NIIT 3.8% × $790,909 = $30,055
Federal total: $202,782
(Plus state tax - varies)
Contrast - if QIP with bonus depreciation: If $200,000 QIP improvements depreciated 100% bonus in year 1, would create §1250 "additional depreciation" recapture on disposition; portion above straight-line would be ORDINARY income, not 25% rate.
| Cost Seg Element | Effect |
|---|---|
| Concept | Engineering study identifies building components that qualify as §1245 personal property (5-, 7-, 15-year MACRS) vs §1250 real property (27.5 / 39-year) |
| Common reclassifications | Carpeting, removable partitions, decorative lighting, parking lot, landscaping, certain wiring, dedicated electrical |
| Bonus depreciation eligibility | 5- and 7-year reclassified property eligible for 100% bonus under §168(k) (OBBBA permanent post-1/19/2025); 15-year QIP also eligible |
| Year 1 tax savings | Significant - immediate expensing of 20-30% of building cost typical for commercial properties |
| Recapture trade-off | Reclassified §1245 property recapture is ORDINARY (37%) vs §1250 unrecaptured (25%) - 12% rate spread on disposition |
| NPV planning | Year 1 benefit at 37% rate vs deferred 25% later - usually favorable if hold >5 years; less so for short-term holds |
| §1031 exchange interaction | Reclassified §1245 property may have boot in §1031 (15% incidental rule); careful allocation |
| Look-back §481(a) adjustment via Form 3115 | Cost seg study for previously-acquired property can trigger §481(a) catch-up of missed depreciation; OBBBA Section 174 framework |
| State tax considerations | State conformity to bonus and §179 varies; CA decouples; large state-level differential |
| §179 Recapture Element | Detail |
|---|---|
| 2026 §179 maximum | $2,560,000 (per Rev. Proc. 2025-32); phaseout begins $4,090,000 acquired |
| Eligible property §179(d)(1) | Tangible personal property used in active trade or business; qualified real property (qualified leasehold improvement property; nonresidential building improvements: HVAC, roof, fire protection, security systems) |
| Recapture treatment | §179 deduction is treated as DEPRECIATION for recapture purposes - converted to §1245 property to extent of §179 expensing |
| HVAC, roof, fire systems trap | Originally §1250 real property; §179 deduction converts to §1245 to extent expensed - ORDINARY income recapture on sale (vs 25% unrecaptured §1250 if not expensed) |
| Cease business use before recovery period | §179 recapture immediately under §179(d)(10) when business use drops below 50% - includes use over recovery period |
| Carryover §179 | Excess §179 deduction (over taxable income limit) carries forward indefinitely; subject to same recapture rules when allowed |
| Listed property strict recapture | Vehicles, computers (pre-2018), aircraft - 50% business use minimum each year; failure triggers MACRS conversion + recapture |
| Bonus Depreciation Element | OBBBA Treatment |
|---|---|
| Authority | OBBBA P.L. 119-21 §70301 (July 4, 2025); IRS Notice 2026-11 (January 2026) |
| 100% bonus depreciation | Permanent for qualified property acquired AFTER January 19, 2025 and placed in service |
| Pre-January 20, 2025 acquisition | Phase-down rates apply: 80% (2023), 60% (2024), 40% (2025 first half) - per pre-OBBBA TCJA schedule |
| Election to use reduced 40% rate | Available for first year after January 19, 2025; applies all-or-nothing to qualified property in that year; spreads benefit over time |
| Component election (Notice 2026-11) | Self-constructed property - treat individual components as separately eligible; allows 100% bonus on components added after January 19, 2025 even if overall project began earlier |
| Qualified Improvement Property (QIP) | 15-year MACRS; eligible for 100% bonus; restoration confirmed under OBBBA (P.L. 119-21) |
| Recapture on disposition | Bonus depreciation increases ordinary income recapture under §1245 (for personal property) or additional §1250 recapture (for QIP excess over straight-line) |
| §168(k)(10) election | Reduced first-year rate election - 40% (most qualified property) or 60% (long-production-period, certain aircraft); statement attached to return |
| §168(n) Element | Detail |
|---|---|
| Authority | IRC §168(n) added by OBBBA P.L. 119-21 |
| Effective date | Property placed in service after July 4, 2025 |
| Eligibility | Manufacturing facility property designated and elected by taxpayer |
| Treatment | Treated as §1245 property if designated - full ordinary income recapture on disposition |
| Bonus depreciation | Eligible for 100% bonus depreciation under §168(k) |
| Section 181 sound recordings | Qualified sound recording productions beginning in tax years ending after July 4, 2025 - eligible for §181 expensing and §168(k)(2) qualified property treatment |
| Practitioner status | Pending detailed Treasury guidance on designation procedures; existing §1245 mechanics apply |
| §1031 + Recapture Element | Detail |
|---|---|
| Authority | §1031 (real property only post-TCJA); Reg §1.1031-2; Rev. Proc. 2000-37 |
| Recapture deferred not eliminated | §1031 exchange preserves prior depreciation; replacement property carries forward depreciation history |
| Boot recognition | If boot recognized, allocated FIRST to unrecaptured §1250 gain (max 25%); remaining to §1231 gain |
| Multi-step exchanges | Multiple §1031 exchanges - depreciation accumulates across all properties; on ultimate taxable sale, all recapture realized |
| Replacement property basis | Substituted basis (relinquished property adjusted basis) + boot recognized; depreciable using new MACRS clock for excess over substituted basis (Reg §1.168(i)-6) |
| Personal property elimination post-TCJA | §1245 personal property cannot be exchanged §1031 post-2017 - immediate recapture on disposition |
| 15% incidental personal property | Personal property incidental to real property (15% rule) - included in §1031; recapture preserved |
| §453 + Recapture Element | Detail |
|---|---|
| §1245 ordinary recapture §453(i)(2) | Recognized IN FULL in year of sale, regardless of installment payment schedule - cannot be deferred |
| §1250 unrecaptured gain | Recognized RATABLY over installment payments per gross profit ratio |
| §1231 gain portion | Ratably under installment method - 0%, 15%, or 20% LTCG rates as recognized |
| Year 1 tax burden | Full §1245 recapture taxed currently while payments spread over years - cash flow mismatch |
| Election out of installment treatment | Available if §453(d) election made; recognize all gain in sale year |
| Practical planning | For §1245-heavy sales, often consider lump-sum rather than installment due to current §1245 recognition |
| Form 6252 | Installment sale reporting; separate computation for §1245 vs §1250 vs §1231 portions |
| §291 Corporate Element | Detail |
|---|---|
| Authority | §291 - applies to C-corporations only |
| Additional recapture on §1250 property | 20% of (amount that would have been recaptured under §1245 - amount actually recaptured under §1250) |
| Effect | C-corps face additional ordinary income recapture on real property dispositions beyond §1250 unrecaptured gain treatment |
| Calculation | "§1245 hypothetical recapture" minus "§1250 actual recapture" × 20% = additional §291 recapture |
| S-corps and partnerships | §291 generally does NOT apply (passthrough entities); but may flow through at corporate-level if certain reorganizations |
| Coordination with regular §1250 | §291 in addition to regular §1250 mechanics for C-corps |
| Coordination | Detail |
|---|---|
| §1411 NIIT | Net Investment Income Tax 3.8% applies to §1245/§1250 gains for individuals if investment-related (rental property; passive business) |
| §469 passive activity loss | Recapture may release suspended PALs under §469(g) upon disposition |
| §199A QBI deduction | §1245 ordinary recapture IS qualified business income under §199A (20% deduction; OBBBA §70105 made §199A permanent and expanded phase-in ranges to $75,000 single / $150,000 MFJ but RETAINED the 20% rate, contrary to the House version that proposed 23%); §1250 unrecaptured gain NOT QBI per §199A(c)(3)(B) |
| §1014 step-up at death | §1245/§1250 recapture potential generally ELIMINATED at death (§1250(g) - subsection (a) doesn't apply to transfer at death except IRD) |
| §691 IRD exception | Recapture inherent in IRD assets (annuities, installment notes) - basis NOT stepped up; recapture preserved |
| §1031 like-kind exchange | Deferred but preserved; carries to replacement property |
| §453 installment sale | §1245 immediate; §1250 ratably |
| §168(k) bonus depreciation | Increases potential recapture exposure - accelerated depreciation = larger recapture pool on sale |
| §179 expensing | Converts to §1245 to extent of §179 amount; recapture as ordinary income |
| §1400Z-2 Opportunity Zones | §1245/§1250 recapture NOT deferrable into QOF - must be recognized; only §1231 gain (after recapture) eligible for QOF deferral |
| Form 4797 Section | Content |
|---|---|
| Part I - §1231 Gains and Losses | Property held >1 year; non-recapture portion; net result determines capital or ordinary character |
| Part II - Ordinary Gains and Losses | Property held ≤1 year; ordinary loss from §1231 net losses; some specific items |
| Part III - §1245 and §1250 Recapture | Compute recapture: Line 25 §1245; Line 26 §1250 ordinary recapture; Lines 27-30 unrecaptured §1250 gain |
| Part IV - §179 Recapture | Recapture when business use drops below 50% |
| Flow to Schedule D | Unrecaptured §1250 gain → Schedule D Line 19; LTCG portion → Schedule D Line 11 |
| Flow to Form 1040 Line 8 | Ordinary income recapture portion |
| Sale of partnership interest | §751 recapture portion - Form 8949 reporting with adjustments; partnership-level §1245/§1250 attributable to interest |
§1245/§1250 recapture based on depreciation ALLOWED or ALLOWABLE under §1016(a)(2). Even if taxpayer failed to claim depreciation, basis is reduced and recapture computed as if claimed. Particularly relevant for home office, rental conversions.
§179 expensing of qualified real property (HVAC, roof, fire protection, security) CONVERTS the expensed portion to §1245 - ordinary income recapture on disposition. Practitioner who treats entire roof sale as §1250 unrecaptured (25%) misses the conversion.
Bonus depreciation taken on QIP creates "additional depreciation" above straight-line - subject to §1250 ORDINARY recapture (37%) rather than 25% unrecaptured §1250 gain. Often missed in disposition planning.
Cost seg reclassifies building components to §1245 - faster depreciation but 37% recapture rate vs 25% if left as §1250. For short-hold properties (<5 years), recapture may exceed NPV benefit. Model carefully.
§1245 recapture FULLY recognized in year of sale per §453(i)(2), regardless of installment schedule. Cash flow mismatch - tax due now, payments received over years. Sellers often surprised.
§291 - C-corporations face additional 20% recapture on §1250 property beyond §1250 ordinary recapture. Effectively converts portion to §1245-style treatment. Individuals/passthroughs not affected.
Multiple §1031 exchanges accumulate depreciation across all properties. On ultimate taxable sale, full recapture realized - across decades of exchanges. Substituted basis tracking critical.
TCJA eliminated personal property from §1031 (effective 2018). §1245 personal property cannot be exchanged - full recapture on disposition. Pre-2018 exchanges still under old rules.
Property used partly business, partly personal - depreciation only on business portion; recapture only on business gain portion. Bifurcation required for sale reporting.
§1250(g) - §1245/§1250 recapture eliminated at death except for IRD items. §1014 step-up wipes prior depreciation. Estate planning consideration for high-recapture-potential assets.
§199A(c)(3)(B) - unrecaptured §1250 gain NOT QBI; §1245 ordinary recapture IS QBI (if qualified business). Practitioners may incorrectly include or exclude.
Disposition of passive activity in fully taxable transaction releases suspended PALs under §469(g). §1031 exchange does NOT release - PALs continue to suspend. §1245 recapture preserved on §1031.
Listed property (vehicles, certain computers) - if business use drops below 50%, all prior excess depreciation (over straight-line) recaptured currently as ordinary income. Track annually.
Self-constructed property started before January 20, 2025 but with components added after - component election allows 100% bonus on later components. Many practitioners default to overall project date.
California, NY, NJ, others decouple from federal bonus depreciation or §179. State-level depreciation differs from federal - state recapture on sale may differ. Track separately.
§197 intangibles (15-year amortization for post-August 10, 1993 acquisitions) - amortizable; §1245 recapture applies. Pre-1993 goodwill - non-amortizable, capital gain on sale, no recapture. Acquisition date critical.
QIP = improvements to interior of nonresidential building, placed in service after building first placed in service, EXCLUDING enlargements, elevators/escalators, internal structural framework. 15-year MACRS post-CARES Act fix; 100% bonus under OBBBA. Definition often misapplied.
Primary authority: IRC §1245 (Gain from dispositions of certain depreciable property - ordinary income recapture). §1245(a) (general rule). §1245(a)(1) (recapture computation - lesser of gain or recomputed basis). §1245(a)(3) (definition of §1245 property). §1245(a)(3)(A) (tangible personal property). §1245(a)(3)(B) (specified real property - bulk storage, single-purpose agricultural). §1245(b) (exceptions - death, gifts, §332/§351/§361/§721/§731 reorganizations to extent of transferor gain). §1250 (Gain from dispositions of certain depreciable realty). §1250(a) (general rule - additional depreciation recapture). §1250(b) (additional depreciation - excess of actual over straight-line). §1250(c) (definition - real property not §1245). §1250(d) (exceptions). §1250(d)(1) (gift exception). §1250(g) (transfer at death - subsection (a) not applicable). §1(h)(1)(D) (unrecaptured §1250 gain - maximum 25% rate for individuals). §1(h)(1)(E) (same - reference). §168 (depreciation - ACRS / MACRS). §168(k) (bonus depreciation). §168(k)(2) (qualified property). §168(k)(10) (reduced 40%/60% first-year rate election). §168(n) (NEW under OBBBA - qualified production property; placed in service after July 4, 2025). §179 (Election to expense certain depreciable business assets). §179(b) (dollar limitation - $2,560,000 for 2026 per Rev. Proc. 2025-32). §179(d)(1) (eligible property). §179(d)(10) (recapture when business use drops below 50%). §280F (listed property limitations). §291 (corporate adjustments - additional §1250 recapture for C-corps). §453 (installment method). §453(i)(2) (§1245 recapture full recognition in sale year). §453(d) (election out of installment). §1011 (basis adjustments). §1016 (adjustments to basis). §1016(a)(2) (depreciation allowed or allowable). §1031 (like-kind exchange - real property only post-TCJA). §1031(d) (substituted basis). §1.168(i)-6 (depreciation of property acquired in like-kind exchange). §1.1031(a)-3 (15% incidental personal property rule). §1411 (NIIT). §1231 (property used in trade or business). §469 (passive activity loss). §469(g) (release of suspended losses on disposition). §197 (15-year amortization of intangibles; §1245 recapture). §199A (QBI deduction). §199A(c)(3)(B) (unrecaptured §1250 gain not QBI). §250 (QBI computation). §1014 (basis step-up at death - erases recapture except IRD). §691 (IRD - basis not stepped up). §6252 (installment sale reporting). §6694, §6662 (preparer/accuracy penalties). Form 4797 (Sales of Business Property). Form 4562 (Depreciation and Amortization). Schedule D (capital gains - line 19 unrecaptured §1250 gain). Tax Cuts and Jobs Act P.L. 115-97 (December 22, 2017) - §13303 (§1031 personal property elimination); §13201 (bonus depreciation 100% temporary). CARES Act 2020 (QIP technical correction - 15-year MACRS retroactive to 2018). One Big Beautiful Bill Act P.L. 119-21 (July 4, 2025) §70301 (100% bonus depreciation permanent for property acquired after January 19, 2025). IRS Notice 2026-11 (early 2026) - 100% bonus depreciation framework, component election. Revenue Procedure 2025-32 (2026 inflation adjustments).