Section 1245 recapture

For your disposition, depreciation deductions previously permitted or available determine how much profit receives ordinary income treatment under section 1245. You classify the recognized balance beyond recapture under section 1231.

Your statutory calculation compares the property's recomputed basis with its amount realized or fair market value, depending on the disposition. The lower amount is compared with your adjusted basis. Except as otherwise provided in section 1245, the amount by which that lower amount exceeds your adjusted basis is ordinary income.

For your sale, exchange, or involuntary conversion, you use the amount realized in this comparison. For any other disposition, you use the property's fair market value. The statute requires recognition of the resulting ordinary income notwithstanding other provisions of the same subtitle, except as otherwise provided in section 1245.

For your property to meet the section 1245 definition, it must be or have been property of a character subject to the depreciation allowance under section 167. It must also fall within one of the statutory categories below.

Your recomputed basis begins with the property's adjusted basis. You add all adjustments reflected in that adjusted basis for depreciation or amortization deductions allowed or allowable to you or any other person. Those deductions can concern the same property or other property.

The statute includes an evidence based exception to the allowed or allowable rule. If you establish through adequate records or other sufficient evidence that the amount allowed for a period was less than the amount allowable, you add the amount allowed for that period.

For your recomputed basis calculation, deductions allowable under sections 179, 179B, 179C, 179D, 179E, 181, 190, 193, and 194 are treated as deductions allowable for amortization. Those specified deductions therefore fall within the statutory recomputed basis framework.

Your depreciable real property is section 1250 property only if it is outside the section 1245 definition. Section 1250 defines its property as real property, other than section 1245 property, that is or has been property of a character subject to the depreciation allowance under section 167.

You therefore cannot classify property solely by whether it is real property. The section 1245 definition itself includes specified real property portions, agricultural or horticultural structures, railroad grading or tunnel bores, and qualified production property, subject to the conditions attached to those categories.

For your section 1250 property, recapture generally applies if you used an accelerated depreciation method or claimed a special depreciation allowance or the commercial revitalization deduction. That is a separate recapture rule from the section 1245 treatment of your depreciation allowed or allowable.

If you report your property sale under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. This applies even if you receive no payments during that year.

If your gain exceeds your depreciation recapture income, you report the rest of the gain under the installment method rules. The rule thus gives your recapture income and your remaining gain different timing treatment.

If gain on your disposition is not recognized in whole or in part under section 1031 or 1033, section 1245(b)(4) limits the gain you take into account under section 1245(a)(1). You determine the underlying nonrecognition and recognized gain without regard to section 1245.

Your section 1245 amount cannot exceed the sum of that recognized gain plus the fair market value of acquired property that is not section 1245 property. In adding that acquired property's value, you exclude any value already taken into account in the recognized gain.

For your like kind exchange, the ordinary income recapture is the lesser of the recapture computed under section 1245(a)(1) or the exchange limit. That limit combines your recognized exchange gain with the fair market value of acquired property that is not section 1245 property, subject to the statutory restriction against counting the same value twice.

If you dispose of property by gift, section 1245(a) does not apply to that disposition. This is an express exception to the subsection that otherwise treats the calculated recapture amount as ordinary income.

For your transfer at death, section 1245(a) also does not apply, except as provided in section 691 concerning income in respect of a decedent. The transfer at death exception therefore retains that specific statutory qualification.