What is the difference between 1231 and 1245 property?

1 Answer

  • 1 month ago

    Both categories can include the same types of property.  The difference is in when the depreciation was taken (as compared to when the laws were put into place).  Here is an except from this link (https://www.investopedia.com/terms/s/section1245.a... which describes it better than I can.

    "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. However, many businesses had already gotten favorable tax treatment by taking depreciation deductions on these properties. So, Congress enacted Section 1245 to recapture depreciation at ordinary income rates on properties sold at a gain.4 

    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. Section 1245 property is section 1245 property only as long as it has unrecaptured depreciation. Once its depreciation is fully recaptured, it becomes section 1231 property."

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