IRC §1250

What it holds

Defines real property (the building shell and structural components) as everything depreciable that is not §1245 property, and caps the tax rate on unrecaptured straight-line depreciation at 25% when you sell.

Where this comes from

Congress added section 1250 in 1964, two years after section 1245, to apply a recapture rule to buildings. In that era, owners could depreciate real estate using accelerated methods, taking bigger deductions early. Section 1250 clawed back the excess over straight-line as ordinary income at sale.

The law changed around it. MACRS now requires straight-line depreciation for buildings, 27.5 years for residential rentals and 39 years for nonresidential property. With no accelerated excess to recapture, section 1250's original bite mostly went away, but its definitions still matter every day.

What it established

Section 1250 property is all depreciable real property that is not section 1245 property. That makes the two sections a complete sorting system. Everything depreciable in a building project lands on one side or the other, and a cost segregation study is the sorting exercise.

For sales, the recapture rule taxes only the depreciation taken beyond straight-line as ordinary income. Since buildings use straight-line under current law, that number is usually zero. The straight-line depreciation does not escape, though. Under the capital gain rate rules, the gain attributable to it, called unrecaptured section 1250 gain, is taxed at a maximum rate of 25 percent rather than the lower long-term capital gain rates.

How it shows up in a study

Every study allocation is a 1245-versus-1250 call. The carpet may move to 5 years as section 1245 property, but the slab, walls, windows, and central HVAC stay as section 1250 property on the long schedule. The study report documents which side each asset lands on and why.

The split matters again at sale. The portion of gain tied to building depreciation gets the 25 percent ceiling, while recapture on the reclassified section 1245 items comes back at ordinary rates. Modeling those two buckets separately is part of honest benefit math.

What it does not mean

Section 1250 does not make building depreciation tax-free at sale. The 25 percent rate on unrecaptured gain is friendlier than ordinary rates, but it is still a real tax, and state taxes can stack on top.

It also does not decide what counts as a structural component. That definition comes from the regulations, mainly Treas. Reg. 1.48-1, and from the courts. And the 25 percent figure is a ceiling under the rate rules, not a flat rate. A taxpayer in a lower bracket can pay less.

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.