IRC §1245

What it holds

Defines tangible personal property for depreciation, and says that when you sell it, the depreciation you took comes back as ordinary income up to the gain.

Where this comes from

Congress added section 1245 in 1962 to close a loophole. Owners were deducting depreciation against ordinary income, then selling the asset and paying only the lower capital gain rate on the recovered value. The deduction and the payback were taxed at different prices.

Section 1245 fixed that with recapture. Recapture means the depreciation you claimed is taxed back as ordinary income when you sell, to the extent you have gain. Along the way, the section had to define which property it covers, and that definition became the legal backbone of cost segregation.

What it established

Section 1245 property includes depreciable personal property, both tangible and intangible, plus certain other tangible property used as an integral part of activities like manufacturing and production. Personal property here is a tax term, not a moving-van term. It means property that is not a building or a structural component of a building.

The recapture rule is mechanical. On a sale, gain is ordinary income up to the depreciation taken on that asset. Only gain above the original cost, if any, gets capital gain treatment. There is no special rate cap for section 1245 recapture, unlike the 25 percent cap that applies to building depreciation under the section 1250 rules.

How it shows up in a study

The entire point of a cost segregation study is to identify the section 1245 property inside a purchase or construction budget. Carpet, decorative lighting, dedicated equipment wiring, and many land improvements can qualify, and the IRS's own audit guide says a quality study identifies and lists the section 1245 property.

The section also drives exit planning. Because reclassified property carries ordinary recapture, we model the sale-day cost next to the present-day benefit. For owners who hold long, exchange under section 1031, or pass property to heirs with a stepped-up basis, the recapture cost shrinks or disappears. For a quick flip, it can eat much of the benefit. The study should inform that math, not hide it.

What it does not mean

Section 1245 does not say that anything bolted to a building is personal property. The classification tests live in the regulations and the case law, including the Whiteco permanence factors. Plenty of attached items stay structural.

It also does not make cost segregation a free lunch. Recapture means part of today's benefit is a timing benefit, not a permanent one. The value comes from the time value of money, rate differences, and planning around the exit. Anyone who tells you there is no payback at sale is skipping this section.

Category

Recapture & property type

Applies to

All property types

Status

Vetted

This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.