IRC 1245 and 1250 Depreciation Recapture: Form 4797 Practitioner Guide

When a business sells depreciable property, the gain is not automatically long-term capital gain. Depreciation recapture rules under IRC 1245 and 1250 pull a portion of that gain back into ordinary income, erasing the capital gain advantage on the depreciation that was previously deducted at ordinary income rates. The interplay between Section 1231 netting, IRC 1245, IRC 1250, and the unrecaptured Section 1250 gain regime determines the character of every dollar of gain on a business property disposition. This guide provides enrolled agents, CPAs, and tax attorneys with a precise, citation-anchored reference for analyzing these rules, completing Form 4797, and navigating the major transactional exceptions: installment sales, like-kind exchanges, S-corp conversions, and the net investment income tax.

All statutory citations, IRS form instructions, and tax rates referenced in this guide must be verified against current law, current IRS publications, and current Form 4797 instructions before being relied on in any specific client matter. Tax law is subject to legislative change; any detail here may be superseded. This guide is for informational purposes only and does not constitute legal or tax advice.

Section 1: The Section 1231, 1245, and 1250 Hierarchy

Understanding depreciation recapture requires understanding the order in which the tax rules apply to a business property disposition. The three sections do not operate independently; they form a layered analysis that begins with Section 1231 and then applies recapture on top of it.

Step 1: Section 1231 Netting

IRC 1231 governs the tax treatment of gains and losses from the sale or exchange of property used in a trade or business (and certain involuntary conversions) held for more than one year. The rule works as follows: all Section 1231 gains and losses from all qualifying dispositions during the tax year are netted together. If the net result is a gain, the gain is treated as long-term capital gain. If the net result is a loss, it is treated as ordinary loss (fully deductible, not subject to capital loss limitations).

This netting is the starting point. Property eligible for Section 1231 treatment includes depreciable property used in a trade or business (held more than one year), real property used in a trade or business (held more than one year), and certain other categories including timber, coal, domestic iron ore, livestock, and unharvested crops. Confirm the full scope of qualifying property under the current text of IRC 1231. For farm and closely held business real estate passing through an estate, the valuation of that real property for estate tax purposes is a separate question; see the IRC 2032A special use valuation guide.

Step 2: Recapture Pulls Ordinary Income Out of the Section 1231 Gain

Once a net Section 1231 gain is established, the recapture rules under IRC 1245 and 1250 step in. These rules "recharacterize" a portion (or all) of what would otherwise be Section 1231 gain into ordinary income. The recapture amount is removed from the Section 1231 gain bucket and recognized as ordinary income in the year of sale.

The practical result: on any sale of depreciable business property, ordinary income (the recapture) is always recognized first. Only the gain above the recapture amount retains capital gain character (either as unrecaptured Section 1250 gain or as remaining Section 1231 long-term capital gain).

The IRC 1231 Look-Back Rule (IRC 1231(c))

Even after Section 1231 netting produces a net gain, that gain may be further recharacterized as ordinary income under the IRC 1231 look-back rule. Under IRC 1231(c), if the taxpayer claimed ordinary Section 1231 losses in any of the five preceding tax years, the current year's net Section 1231 gain is recharacterized as ordinary income (not long-term capital gain) to the extent of those prior Section 1231 losses.

The look-back applies after the initial Section 1231 netting and after recapture, on the remaining Section 1231 gain. Practitioners must track prior Section 1231 ordinary losses for each client over the rolling five-year window. These prior losses are disclosed on Form 4797 in the year the current Section 1231 gain is recognized.

Section 2: IRC 1245 Recapture -- Personal Property and Certain Real Property

IRC 1245 is the more frequently encountered recapture provision for most practitioners. It applies broadly to depreciable personal property and produces ordinary income on disposition to the full extent of depreciation claimed.

What Is IRC 1245 Property?

IRC 1245 property includes tangible personal property (equipment, machinery, vehicles, computers, office furniture) and intangible personal property that has been subject to depreciation or amortization deductions (such as certain patents, customer lists, and software under applicable rules). It also includes certain real property that was classified as personal property and thus entitled to accelerated depreciation under pre-1987 rules, or real property reclassified as personal property (5-year or 15-year MACRS) through a cost segregation study.

The critical characteristic: IRC 1245 property is any depreciable property (other than IRC 1250 property) on which depreciation or amortization deductions were claimed. If the asset was depreciated, it is likely IRC 1245 property, and recapture must be analyzed on disposition.

The Recapture Rule: IRC 1245(a)(1)

Under IRC 1245(a)(1), gain on the disposition of IRC 1245 property is treated as ordinary income to the extent of the total depreciation (or amortization) allowed or allowable on the property since it was placed in service. "Allowed or allowable" means the recapture is computed on the total depreciation the taxpayer was entitled to claim, regardless of whether the taxpayer actually claimed it on their return. A taxpayer who failed to claim depreciation in a prior year cannot reduce the recapture amount by that unclaimed deduction.

The recapture amount is the lesser of: (a) the total depreciation (or amortization) allowed or allowable since the property was placed in service, or (b) the total gain recognized on the disposition. If the property is sold at a loss relative to its original cost but above its adjusted basis, the IRC 1245 recapture is limited to the actual gain; you cannot recapture more than you gained. If the property is sold below adjusted basis (a loss), there is no IRC 1245 recapture.

No Deferral, No Capital Gain Treatment

IRC 1245 ordinary income is mandatory and immediate. The recaptured amount cannot be excluded from gross income, cannot be treated as long-term capital gain, and cannot be deferred to a future year (with limited exceptions for installment sales, like-kind exchanges, and involuntary conversions, discussed separately below). In the year the IRC 1245 property is disposed of, the recapture is ordinary income, reported on Form 4797, and taxed at ordinary income rates.

This rule eliminates the capital gain rate advantage on the depreciated portion of the asset's value. Because the taxpayer deducted the depreciation at ordinary income rates (reducing income that would have been taxed at ordinary rates), the recapture rule prevents the taxpayer from then converting the gain attributable to that depreciation into a lower-taxed capital gain.

Section 179 and Bonus Depreciation: Fully Subject to Recapture

IRC 179 deductions (immediate expensing of qualified property) and bonus depreciation under IRC 168(k) are both treated as "depreciation allowed" for IRC 1245 recapture purposes. When a taxpayer claims a $150,000 Section 179 deduction on a piece of equipment and then sells the equipment three years later, the full $150,000 (plus any regular MACRS depreciation taken in the interim) is included in the recapture computation.

This is a significant planning point for clients who aggressively use Section 179 or bonus depreciation: selling the asset in any year while it still has value (before full economic depreciation) will likely produce a substantial ordinary income recapture charge, up to the entire gain on the sale. The deduction was valuable in the year it was taken; the price is recapture on disposition.

Cost Segregation and IRC 1245 Recapture

A cost segregation study reclassifies components of a building from IRC 1250 real property (39-year or 27.5-year MACRS) to IRC 1245 personal property (5-year or 15-year MACRS). This produces faster depreciation deductions during ownership. On sale of the property, the reclassified components are IRC 1245 property subject to full ordinary income recapture on all depreciation claimed. The building shell (retained as 39-year or 27.5-year IRC 1250 property) is governed by the IRC 1250 and unrecaptured Section 1250 gain rules described below.

Practitioners advising clients on cost segregation should model the recapture consequences at the anticipated sale date alongside the accelerated deduction benefit. The timing difference can be favorable even with recapture, but it must be disclosed and computed accurately.

Section 3: IRC 1250 Recapture -- Real Property

IRC 1250 is the depreciation recapture provision for real property. Its ordinary income recapture impact is substantially narrower than IRC 1245 for most modern transactions, because the vast majority of commercial and residential real property has been depreciated on a straight-line basis under MACRS since 1986. However, the "unrecaptured Section 1250 gain" concept under IRC 1(h)(6) ensures that a portion of the gain on real property dispositions is still taxed more heavily than standard long-term capital gain rates, even when no ordinary income IRC 1250 recapture applies.

What Is IRC 1250 Property?

IRC 1250 property is real property (buildings, structural components, and inherently permanent structures) that has been subject to depreciation deductions under IRC 167 or MACRS. This includes residential rental property (apartments, single-family rentals) depreciated over 27.5 years under MACRS, and nonresidential real property (office buildings, retail centers, warehouses) depreciated over 39 years under MACRS.

Post-1986 MACRS Straight-Line: Generally No Ordinary Income Recapture

For real property placed in service after 1986 and depreciated under MACRS using the straight-line method, IRC 1250 ordinary income recapture is generally zero. The IRC 1250 ordinary income recapture rule applies only to "additional depreciation," which is defined as the excess of the depreciation actually claimed over what would have been allowed under the straight-line method. Because MACRS uses straight-line for real property, there is no excess -- the "additional depreciation" is zero, and therefore no IRC 1250 ordinary income recapture arises.

This is a fundamental distinction from IRC 1245 property: selling a fully depreciated commercial building (post-1986, MACRS straight-line) will not produce ordinary income IRC 1250 recapture. It will, however, produce unrecaptured Section 1250 gain (discussed next), which is still taxed at a rate above the standard long-term capital gain rate.

Pre-1987 Accelerated Depreciation: IRC 1250 Ordinary Income Recapture Applies

If real property was placed in service before 1987 and the taxpayer used an accelerated depreciation method (such as 175% declining balance or sum-of-years-digits under the ACRS rules in effect before the Tax Reform Act of 1986), IRC 1250 ordinary income recapture applies to the "additional depreciation" (the cumulative excess of accelerated depreciation over what would have been allowed under straight-line). This ordinary income recapture is recognized in full in the year of disposition.

Pre-1987 property is becoming increasingly rare in active practice, but practitioners working with long-held real estate, estate administrations, or partnership assets with historical cost basis records may still encounter pre-1987 IRC 1250 recapture situations.

Unrecaptured Section 1250 Gain: IRC 1(h)(6)

Even when no ordinary income IRC 1250 recapture applies (the common post-1986 scenario), the total straight-line depreciation previously claimed on real property is classified as "unrecaptured Section 1250 gain" under IRC 1(h)(6). This amount is not ordinary income, but it is taxed at a special rate that is higher than the standard long-term capital gain rate applicable to other capital gains.

The rate: confirm at IRS.gov. The tax rate for unrecaptured Section 1250 gain is set by IRC 1(h) and may be modified by future legislation. Practitioners must not rely on any specific rate cited outside the current statute or current IRS guidance. Always confirm the applicable rate directly with IRS.gov or the current revenue procedure before advising.

The unrecaptured Section 1250 gain is recognized as a separate category in the gain computation. It reduces the amount of gain eligible for the standard long-term capital gain rates. The ordering rule is: ordinary income recapture (IRC 1245 or 1250, if any) is recognized first; then unrecaptured Section 1250 gain; then the remaining gain at standard long-term capital gain rates (if still within Section 1231 gain).

Section 4: Form 4797 -- Mechanics

Form 4797 (Sales of Business Property) is the federal form on which the taxpayer reports gains and losses from dispositions of business property, including all depreciation recapture under IRC 1245 and 1250. It must be filed with the return for the year of sale. The form performs several functions simultaneously: it computes the ordinary income recapture, reports the Section 1231 gains and losses, and determines which amounts flow to Schedule D and which are ordinary income.

Overview of Form 4797 Structure

Form 4797 is organized into multiple parts, each covering a different category of property or transaction type. At a general level (hedge all specific line assignments to current Form 4797 instructions on IRS.gov, as lines change periodically):

• Part I covers Section 1231 gains and losses from property held more than one year, including real property and depreciable property used in a trade or business. The net result of Part I (after applying the IRC 1231(c) look-back for prior Section 1231 losses) flows to Schedule D as long-term capital gain or appears as ordinary loss on the return.
• Part II covers ordinary gains and losses, including property held one year or less, recapture amounts flowing from Part III, and involuntary conversions of property not held for investment. Ordinary income from recapture flows through Part II to the taxpayer's ordinary income on the return.
• Part III is the recapture section. It computes the IRC 1245 and 1250 ordinary income recapture on dispositions of depreciable property. The recapture computed in Part III flows to Part II as ordinary income. Part III also computes the total gain on sale, which is then split between the recaptured ordinary income (Part II) and the remaining Section 1231 gain (Part I).
• Part IV addresses recapture on certain listed property, certain Section 179 elections, and other specific situations. Consult IRS instructions for Part IV applicability.

The specific line numbers and instructions within each part of Form 4797 change from year to year. Always use the Form 4797 instructions for the tax year of the disposition, available at IRS.gov.

Year of Sale: Form 4797 Is Required

Form 4797 must be filed in the year of sale for all business property dispositions, including those structured as installment sales. Even if the taxpayer is deferring some gain on the installment method, the year-of-sale Form 4797 still reports all IRC 1245 and 1250 recapture income in full. Only the non-recapture gain (the gain above recapture) may be deferred on Form 6252 (Installment Sale Income). The recapture is reported and taxable immediately.

Unrecaptured Section 1250 Gain on Form 4797 and Schedule D

The computation of unrecaptured Section 1250 gain is not fully performed on Form 4797 itself. The gain flows through Form 4797 to Schedule D, and the unrecaptured Section 1250 gain is calculated in the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions (or in the applicable tax software). The worksheet determines how much of the gain on real property is subject to the special IRC 1(h)(6) rate versus the standard long-term capital gain rate.

Hedge all specific worksheet and line references to current Schedule D instructions on IRS.gov for the applicable tax year.

Section 5: Installment Sale Interaction (IRC 453(i))

The installment method under IRC 453 generally allows a seller to spread gain recognition over the period payments are received, deferring tax until cash arrives. This deferral rule has a hard statutory override for depreciation recapture income.

The Hard Rule: All Recapture Is Recognized in the Year of Sale

Under IRC 453(i), when a taxpayer sells IRC 1245 or 1250 property on the installment method, all IRC 1245 ordinary income recapture and all IRC 1250 ordinary income recapture (if any) is recognized in full in the year of sale, regardless of when the installment payments are actually received. The recapture cannot be deferred, spread, or delayed by the installment method. It is always year-one income.

Only the gain in excess of the total recapture amount is eligible for installment reporting. If the total gain is $500,000 and the IRC 1245 recapture is $300,000, the $300,000 is ordinary income in the year of sale, and only the remaining $200,000 may be reported on the installment method as payments are received.

Practical Effect: The Year-One Tax Trap

A seller of heavily depreciated equipment or pre-1987 real property with significant accumulated depreciation may receive only a small down payment in year one but owe ordinary income tax on a large recapture amount. If a business owner sells $1,000,000 of equipment (fully depreciated, adjusted basis of zero) for $400,000 down and $600,000 over four years, the full gain of $1,000,000 up to the adjusted basis is recapture -- and all of it is ordinary income in year one. The installment method produces no tax relief on the recapture component.

Practitioners structuring installment sales of depreciable business property must model the year-one ordinary income tax on the recapture separately from the installment gain, so the seller can plan for the cash requirement. The installment sale may still be favorable for the non-recapture gain, but the recapture tax is due regardless of cash received.

For the full mechanics of installment sale reporting, the gross profit ratio computation, and Form 6252, see the IRC 453 installment sale Form 6252 practitioner guide.

Section 6: Like-Kind Exchange Interaction

A qualifying like-kind exchange under IRC 1031 is one of the few mechanisms that can defer IRC 1245 recapture. The deferral is not an elimination; the recapture potential carries forward to the replacement property and is triggered on any subsequent disposition that is not itself part of a qualifying exchange.

The General Rule: IRC 1245(b)(4) Deferral

Under IRC 1245(b)(4), in a qualifying like-kind exchange under IRC 1031, the IRC 1245 recapture that would otherwise be recognized on the disposition of the relinquished property is not triggered, to the extent that the gain itself is deferred. The recapture potential "carries over" to the replacement property. The replacement property's adjusted basis reflects the deferred gain and the deferred recapture, so the recapture will be triggered on any future taxable disposition of the replacement property.

This is the primary tax advantage of a like-kind exchange for taxpayers with heavily depreciated equipment or real property: the exchange defers both the Section 1231 gain and the IRC 1245 or 1250 recapture simultaneously. The taxpayer continues depreciating the replacement property from its carryover basis, generating new deductions, while the old recapture potential waits to be triggered.

Boot: Recapture Is Triggered to the Extent of Boot Received

If the taxpayer receives boot (cash, debt relief, or non-like-kind property) in the exchange, gain is recognized to the extent of the boot received. Critically, IRC 1245 recapture is recognized first, before any other character of gain, up to the boot amount. If the boot received is $100,000 and the total recapture potential is $150,000, then $100,000 of ordinary income recapture is recognized in the year of the exchange.

The remaining $50,000 of recapture potential ($150,000 minus $100,000 recognized) carries over to the replacement property's basis and will be triggered on any future taxable disposition. Planning an exchange to minimize or avoid boot is therefore directly related to minimizing current-year recapture recognition.

Tracking the Carryover Recapture on Replacement Property

After a like-kind exchange, the replacement property carries two layers of deferred recapture: (a) the original relinquished property's deferred recapture (which carries over under IRC 1245(b)(4)) and (b) any new depreciation taken on the replacement property after the exchange. On any subsequent taxable disposition of the replacement property, the total IRC 1245 recapture computation covers both layers.

Practitioners must maintain detailed records of the exchange, including the relinquished property's total accumulated depreciation, any boot recognized, and the replacement property's adjusted basis and ongoing depreciation schedule. This documentation is essential for computing recapture on the eventual sale of the replacement property, which may occur years or decades later.

The same carryover principle applies to other non-recognition transfers. When depreciable property is contributed to a corporation in a tax-free IRC 351 exchange, the recapture potential is not triggered on the contribution; it carries over with the property's basis under IRC 362(a) and is recognized on a later taxable disposition by the corporation. For the control test, boot analysis, and basis mechanics of that transaction, see the IRC 351 tax-free incorporation guide.

For the full mechanics of like-kind exchanges, qualified intermediary requirements, identification periods, and exchange agreement rules, see the IRC 1031 like-kind exchange qualified intermediary practitioner guide.

Section 7: S-Corp Conversion -- Built-In Gains Interaction

When a C corporation elects S corporation status, any built-in gain (the excess of fair market value over adjusted basis at the date of conversion) on appreciated assets is potentially subject to the IRC 1374 built-in gains tax (BIG tax) if recognized during the recognition period. Depreciation recapture is a common and significant component of built-in gain in this context.

Depreciation Recapture as Built-In Gain

At the time of S election, the IRC 1245 recapture potential on depreciable assets (the total depreciation claimed on personal property, the accumulated cost segregation components, any Section 179 or bonus depreciation taken) is a component of the built-in gain on those assets. The "built-in gain" on any asset is the excess of its fair market value over its adjusted basis at the conversion date. For a piece of equipment with a $0 adjusted basis (fully depreciated under Section 179) and a $200,000 fair market value, the built-in gain is $200,000, and the IRC 1245 recapture potential is also $200,000 (or up to the gain recognized).

If the S corporation sells that asset during the recognition period, the built-in gain (including the recapture component) is subject to the BIG tax at the corporate level under IRC 1374. The sale also generates pass-through income to the S corporation shareholders, creating a potential double-taxation issue on the same income.

The Recognition Period: IRC 1374(d)(7)

Under IRC 1374(d)(7), the recognition period is 5 years after the first day of the first taxable year for which the S election is effective. Built-in gains recognized within this 5-year window are subject to the BIG tax; built-in gains recognized after the recognition period are not.

For S corporations converting from C status, the 5-year recognition period creates a strong incentive to delay asset sales (or to hold assets with significant depreciation recapture potential) until after the recognition period expires. However, the recognition period analysis requires careful attention to the specific asset's built-in gain at conversion, the holding period, and any changes to IRC 1374 under current law.

BIG Tax Rate: Confirm at IRS.gov

The BIG tax is imposed at the corporate tax rate under IRC 1374. Do not state 21% or any other specific percentage; the corporate rate is subject to legislative change and must be confirmed at IRS.gov or the current statute before advising. The BIG tax is a corporate-level entity tax; after the BIG tax is paid, the net recognized built-in gain passes through to shareholders as S corporation income, potentially subject to shareholder-level income tax. Consult the current IRC 1374 regulations and IRS guidance for the full computation.

For the full analysis of the IRC 1374 BIG tax, computation mechanics, net recognized built-in gain limitations, and conversion planning strategy, see the IRC 1374 built-in gains tax S-corp conversion practitioner guide.

Section 8: Net Investment Income Tax (NIIT) Interaction

Depreciation recapture income and Section 1231 gain intersect with the Net Investment Income Tax (NIIT) under IRC 1411 in ways that depend critically on whether the taxpayer materially participates in the activity that produced the income.

Material Participation: Generally Not NII

Under IRC 1411(c)(4), gain from the disposition of property used in a trade or business in which the taxpayer materially participates is generally excluded from net investment income. This means IRC 1245 recapture income arising from the sale of equipment used in a business in which the taxpayer meets the material participation standards is generally not subject to the NIIT.

The material participation analysis follows the rules under the passive activity regulations (generally, IRC 469 and the regulations thereunder). The same participation tests that govern whether an activity is passive also determine whether gain from that activity is net investment income. A business owner who works in the business full-time and clearly meets the material participation tests should generally not face NIIT on recapture income from that business's assets.

Passive Investors: Recapture Income May Be NII

If the taxpayer holds the business property as a passive investor (does not materially participate), the recapture income from the disposition of that property is generally included in net investment income and may be subject to the NIIT. The NIIT applies to the lesser of the taxpayer's net investment income or the excess of modified adjusted gross income over the applicable threshold.

Do not state a specific NIIT rate; the rate is set by IRC 1411 and is subject to legislative change. Confirm the current NIIT rate at IRS.gov before advising on any transaction where NIIT exposure is present.

Real Property Investment: Unrecaptured Section 1250 Gain and NIIT

Unrecaptured Section 1250 gain from investment real estate (held by a non-trader, non-dealer taxpayer who does not materially participate in a real estate trade or business within the meaning of IRC 469(c)(7)) is generally included in net investment income. A taxpayer who owns rental real estate as a passive investor and sells the property will generally face NIIT exposure on both the unrecaptured Section 1250 gain and any remaining Section 1231 gain above that amount.

Real estate professionals (those who qualify under IRC 469(c)(7)) may be able to avoid NIIT on real property disposition gain if they also meet the material participation test for the specific rental activity. This is a fact-specific determination and requires careful analysis of hours, participation records, and the applicable regulations.

For the full NIIT analysis, threshold amounts, Form 8960 mechanics, and the passive vs. non-passive characterization of gain, see the IRC 1411 net investment income tax Form 8960 practitioner guide.

Frequently Asked Questions

Common questions from enrolled agents, CPAs, and tax attorneys working on business property dispositions and depreciation recapture analysis.

Related Practitioner Guides

The following guides cover the transactional contexts and tax regimes that interact most directly with IRC 1245 and 1250 depreciation recapture.

• IRC 168(k) Bonus Depreciation and IRC 168(n) QPP Guide -- IRC 168(k) bonus depreciation and IRC 168(n) qualified production property immediate expensing accelerate deductions that create IRC 1245 depreciation recapture on a later sale, so the expensing decision directly drives the ordinary-income recapture exposure computed on Form 4797.
• IRC 1245 1250 depreciation recapture cost segregation OBBBA bonus depreciation guide -- covers cost segregation reclassification of real property to Section 1245 personal property, OBBBA 100% QPP bonus depreciation and its effect on basis and recapture, the maximum 25% unrecaptured Section 1250 gain rate, and how IRC 1031 exchanges and IRC 1014 stepped-up basis interact with recapture on disposition.
• IRC 453 Installment Sale Form 6252 Gross Profit Ratio Practitioner Guide -- covers installment sale mechanics, Form 6252 computation, the gross profit ratio, and the critical IRC 453(i) rule requiring full year-of-sale recapture recognition regardless of installment payment timing.
• IRC 1031 Like-Kind Exchange Qualified Intermediary Practitioner Guide -- covers IRC 1031 exchange requirements, qualified intermediary roles, identification and exchange periods, boot analysis, and the carryover of IRC 1245 recapture potential to replacement property under IRC 1245(b)(4).
• IRC 1374 Built-In Gains Tax S-Corp Conversion Practitioner Guide -- covers the BIG tax computation, recognition period, the role of depreciation recapture in built-in gain, and conversion planning strategy for C corporations electing S status.
• IRC 1411 Net Investment Income Tax Form 8960 Practitioner Guide -- covers NIIT thresholds, Form 8960 mechanics, the material participation exception for recapture income from active businesses, and NIIT exposure for passive investors and real estate investors on unrecaptured Section 1250 gain.
• IRC 751 hot assets unrealized receivables and TD 10048 Form 8308 guide -- IRC 1245 and IRC 1250 recapture is included within the IRC 751(c) definition of unrealized receivables, so when a partner sells a partnership interest holding depreciable property, the recapture potential converts to ordinary income under IRC 751(a); this guide covers that overlap along with the substantially appreciated inventory test and the TD 10048 Form 8308 Part IV reporting requirement.
• IRC 1091 Wash Sale Rule: Digital Assets and Form 8949 -- when securities subject to depreciation recapture are sold at a loss and repurchased within the 61-day window, the wash sale basis adjustment under IRC 1091(d) interacts with the recapture analysis on eventual sale; this guide covers the wash sale mechanics and Form 8949 reporting.
• IRC 267 Related Party Loss Disallowance Guide -- when depreciable business property is sold between related parties at a loss, IRC 267(a)(1) disallows the loss and no depreciation recapture is triggered (recapture requires gain); Form 4797 is used for both the disallowed related party loss and any future recapture analysis when the purchaser sells the property to a third party.
• IRC 121 Home Sale Exclusion and Principal Residence Gain Exclusion Practitioner Guide -- home office and rental depreciation deductions create unrecaptured Section 1250 gain that is not covered by the IRC 121 exclusion and is taxed at up to 25% per IRC 1(h)(1)(D); the depreciation recapture computation and the IRC 121 exclusion must each be completed before the home sale gain computation is finalized; the two reductions apply separately and may compound when both are present
• Form 8824 Like-Kind Exchange Reporting: Boot and Basis
• IRC 1(h): Long-Term Capital Gains and Qualified Dividends Preferential Rate Practitioner Guide -- IRC 1(h) preferential rate tiers (0%, 15%, and 20%), income stacking mechanics, qualified dividend holding period rules, unrecaptured Section 1250 gain at the 25% maximum rate, and OBBBA permanence under Pub. L. 119-21.
• IRC 1221, 1222, 1223: Capital Asset Classification and Holding Period -- whether the asset is a capital asset under IRC 1221 determines whether the IRC 1231 gain becomes long-term capital gain before recapture is applied.
• IRC 1231: Section 1231 Property, Netting, and Lookback Rule -- the netting framework that applies to Section 1231 gain remaining after IRC 1245 and 1250 recapture; the recaptured ordinary income is carved out before the Section 1231 pool is netted, so the two computations are always run together on Form 4797.
• IRC 280F: Listed Property and Luxury Vehicle Depreciation -- when listed property (passenger automobile, computer, or other IRC 280F(d)(4) property) is sold or exchanged, the IRC 1245 recapture analysis uses the actual depreciation allowed or allowable in prior years, capped by the IRC 280F annual limits; the recapture amount is the lesser of the gain or the cumulative depreciation deducted (subject to the IRC 280F annual limits), and the remainder is Section 1231 gain eligible for capital gain rates.
• IRC 453A: Installment Sale Interest Charge -- IRC 1245 recapture is recognized in full in the year of sale under IRC 453(i) and is not eligible for installment reporting; only the post-recapture gain can be spread under IRC 453 and, if large enough, trigger the IRC 453A interest charge on the installment obligation; practitioners running Form 4797 for installment transactions must check the IRC 453A threshold before completing the return.
• IRC 179: Section 179 Expensing Election Guide -- all IRC 179 deductions previously claimed are treated as depreciation allowed for purposes of IRC 1245; on a taxable disposition, gain up to the sum of all prior IRC 179 elections plus other depreciation is recaptured as ordinary income, reported on Form 4797 Part III; practitioners who advise on IRC 179 elections must simultaneously model the IRC 1245 recapture exposure that the election creates on a later sale, conversion, or drop in listed-property business use below 50%.
• IRC 357, 358, and 362: Assumption of Liabilities in Section 351 Incorporations -- when a taxpayer contributes depreciable property subject to a mortgage to a corporation under IRC 351, the corporation assumes the liability; if the total liabilities assumed exceed aggregate basis (IRC 357(c)), the taxpayer recognizes gain and the gain character is determined by the nature of the transferred property -- if the property has IRC 1245 or IRC 1250 recapture potential, the IRC 357(c) gain recognized is ordinary income to the extent of prior depreciation; practitioners must layer the IRC 1245/1250 recapture analysis on top of the IRC 357(c) excess-liabilities test when analyzing any leveraged IRC 351 contribution of depreciable property.
• IRC 311: Corporation Gain Recognition on Distributions of Appreciated Property -- when a corporation distributes depreciable property subject to IRC 1245 or IRC 1250 recapture in a non-liquidating property dividend, IRC 311(b) requires the corporation to recognize gain equal to the excess of FMV over adjusted basis; the character of that gain is then determined by IRC 1245 and 1250 -- ordinary income to the extent of prior depreciation deductions -- making a distribution of fully depreciated property particularly costly at the corporate level; practitioners must layer the IRC 311(b) gain computation on top of the IRC 1245/1250 recapture analysis for every in-kind distribution of depreciable property.
• IRC 165: Casualty Loss, Theft Loss, and Disaster Area Deductions Practitioner Guide -- when depreciable property is destroyed in a casualty event, the IRC 165 deductible loss on Form 4684 is computed against the property's adjusted basis; the interaction between the IRC 165 casualty loss and any prior depreciation recapture potential under IRC 1245 or 1250 must be analyzed before the Form 4797 disposition is finalized.
• IRC 856 REIT Qualification -- Depreciation recapture rules under IRC 1245/1250 that apply to REIT property sales and interact with the IRC 856(c)(3)(H) income test for prohibited transaction income.

Tax Software Built for Complex Business Property Dispositions

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