what is section 1245 
section 1245 is part of the internal revenue code irc that covers the applicable tax rate for gains from the sale or transfer of depreciable and amortizable property it applies to certain types of real or tangible business property that have been held by that business for more than 12 months section 1245 outlines what properties are included in this treatment and when the ordinary income tax rate applies to their sale rather than the capital gains tax rate understanding section 1245section 1245 recaptures depreciation or amortization allowed or allowable on tangible and intangible personal property at the time a business sells such property at a gain section 1245 taxes the gain at ordinary income rates to the extent of its allowable or allowed depreciation or amortization 1the irs defines section 1245 property as the following section 1245 properties must be or have been subject to an allowance for depreciation or amortization they can be either personal property either tangible or intangible or other tangible property except buildings and their structural components used as any of the following section 1245 is a mechanism to recapture at ordinary income tax rates allowable or allowed depreciation or amortization taken on section 1231 property allowable or allowed means that the amount of depreciation or amortization recaptured is the greater of that taken or that could have been taken but was not 2a section 1231 property is a real or depreciable business property that has been held by the business for more than one year 1section 1245 backgroundconceptually a lower tax rate on gain means less tax payable and a higher tax rate on loss means a larger offset of taxable income and less tax payable for this reason tax planning strategies seek lower capital gains rates for gains and higher ordinary income rates for losses congress enacted irc section 1231 to favor businesses by allowing them to apply a lower capital gains rate on gains and a higher ordinary income rate on losses recognized from the sale of their property 2 however many businesses had already gotten favorable tax treatment by taking depreciation or amortization deductions on these properties so congress enacted section 1245 to recapture depreciation and amortization at ordinary income rates on properties sold at a gain the wording of section 1245 implies that it covers a new or different class of property section 1245 property but in reality section 1245 property is merely section 1231 property that has been depreciated or amortized section 1245 property is section 1245 property only as long as it has unrecaptured depreciation or amortization once its depreciation or amortization is fully recaptured it becomes section 1231 property 2tax picture of a sale of section 1245 propertyif section 1245 property is sold at a loss it converts to section 1231 property for tax purposes the loss is ordinary subject to netting and look back if section 1245 property is sold at a gain it remains section 1245 property to the extent of depreciation or amortization the gain is taxed at ordinary income rates 2once depreciation or amortization has been recaptured it converts to section 1231 property any remaining gain is taxed at capital gains rates 2tax rates for capital gains are lower than ordinary income tax rates 34example of a sale of section 1245 propertyas an example imagine that a business owns a 100 widget and takes 75 of depreciation the widget s adjusted tax basis is its 100 cost minus 75 of depreciation or 25 the business sells the widget for 150 the gain is the 150 sale price minus the 25 adjusted tax basis or 125 of that 125 75 the depreciated amount is a section 1245 gain taxed at ordinary income rates the remaining 50 125 75 is a section 1231 gain taxed at capital gains rates if the business sells the 100 widget for 20 you have a loss of 20 sale price minus 25 adjusted tax basis or 5 since there is a 0 gain section 1245 does not apply and the 5 loss is a section 1231 loss that is ordinary 