What is the difference between Section 1231 and 1245 property?
Section 1231 applies to all depreciable business assets owned for more than one year, while sections 1245 and 1250 provide guidance on how different asset categories are taxed when sold at a gain or loss.
What Is a Section 1245 Property? Generally speaking, Section 1245 property includes the depreciable property used in a business not including real estate. If you depreciate business property and own it longer than 12 months, it likely qualifies as Section 1245.
Section 1231 property is real or depreciable business property held for more than one year. A section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain does not apply.
A few examples of 1245 property are: furniture, fixtures & equipment, carpet, decorative light fixtures, electrical costs that serve telephones and data outlets.
Section 1245 assets are depreciable personal property or amortizable Section 197 intangibles. Section 1250 assets are real property, where depreciable or not.
Section 1250 generally applies to real property (such as commercial buildings and rental houses) and real property structural components (such as roofs and flooring) that are depreciated over longer periods of time than section 1245 property.
Section 1231 gains are gains from depreciable property and real property used in a trade or business and held for more than one year, other than inventory or property held for sale in ordinary course. Such gains have traditionally enjoyed “favored nation” status in the Code.
The term comes from section 1231 of the U.S. Internal Revenue Code. Section 1231 assets include buildings, machinery, land, timber and other natural resources, unharvested crops, cattle, livestock and leaseholds that are at least a year old.
The Basics of Section 1250
Section 1250 addresses the taxing of gains from the sale of depreciable real property, such as commercial buildings, warehouses, barns, rental properties, and their structural components at an ordinary tax rate.
The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses. the portion of such losses taken into account under paragraph (1) for such preceding taxable years.
What is considered Section 1250 property?
Section 1250 addresses the taxing of gains from the sale of depreciable real property, such as commercial buildings, warehouses, barns, rental properties, and their structural components at an ordinary tax rate. However, tangible and intangible personal properties and land acreage do not fall under this tax regulation.
Form 4797 is used to report gains made from the sale or exchange of business property, including property used to generate rental income, and property used for industrial, agricultural, or extractive resources.
Section 1245 is a way for the IRS to recapture allowable or allowed depreciation or amortization the taxpayer has taken on 1231 property. This recapture occurs at the time a business sells certain tangible or intangible personal property at a gain.
Section 1250 property is real property that can be depreciated. Depending on how depreciation was taken, taxable gains at various rates may be produced. By working with your financial team, you can defer those gains through a 1031 exchange.
