Section 1245 recapture is the rule that taxes the gain on a sold business asset as ordinary income, up to the depreciation you claimed on it. If you deducted depreciation or Section 179 on equipment, vehicles, or machinery and then sell the asset for more than its depreciated value, the gain is not treated as a capital gain until the depreciation has been paid back. It is reported on Part III of Form 4797 and taxed at your regular rates.
This guide explains the formula, shows a worked example, separates Section 1245 from Section 1250 and Section 1231, and covers the planning moves that matter before you sell.
TL;DR
- Section 1245 recapture is ordinary income equal to the lesser of your total depreciation or your gain on the sale.
- It applies mainly to personal property used in a business: equipment, vehicles, furniture, machinery, and similar assets.
- Section 1250 covers real property, such as buildings, and works differently. Gain tied to straight-line depreciation is generally taxed at a maximum 25% rate instead.
- Any gain above your depreciation is usually Section 1231 gain. Recapture is calculated first, and Part III of Form 4797 is where you do it.
- Bonus depreciation and Section 179 raise recapture exposure, so model the sale before you sign.
Table of Contents
- What Section 1245 recapture actually does
- Which assets are Section 1245 property
- Section 1245 vs. 1250 vs. 1231
- A worked example
- What rate applies
- How to report recapture on Form 4797
- Exchanges, gifts, and death
- Planning before you sell
- Perspective: why we model the exit on day one
- Work with us on your sale or your depreciation plan
- FAQ
- Sources
What Section 1245 recapture actually does
When you depreciate an asset, you reduce its tax basis and lower your taxable income in the years you own it. That is the benefit. The trade-off appears at sale: if the asset sells for more than its adjusted basis, the IRS wants the earlier deductions back as ordinary income rather than letting you convert them into a lower-taxed capital gain.
The statute and regulations state it in technical terms. Section 1245 treats as ordinary income the excess of the lower of the property's recomputed basis or the amount realized over its adjusted basis. Recomputed basis is, in plain terms, your original basis with depreciation and amortization added back. So the practical rule is:
Ordinary income = the lesser of (a) total depreciation taken, or (b) the gain on the sale.
The rule also reaches beyond ordinary sales. The statute requires ordinary income to be recognized on certain dispositions even when gain would not otherwise be recognized, which is why a gift or a distribution of property is not a clean way around it.
Why the lesser-of test matters
Recapture can never exceed the gain you actually have. If you sell a machine for less than you paid, only the part of the gain that reflects previous depreciation is recaptured. If you sell it at a loss, there is no recapture at all, and the loss is handled under the Section 1231 rules.
Which assets are Section 1245 property
The name sounds narrow, but it covers most of what a working business owner buys and depreciates:
- Vehicles, trucks, and vans used in the business
- Tools, machinery, and shop equipment
- Office furniture, computers, and fixtures
- Medical, dental, and wellness equipment, such as treatment tables, lasers, and diagnostic devices
- Certain amortized intangibles, including some acquired business assets
- Qualified production property placed in service after July 4, 2025, if you designate and elect it under Section 168(n)
IRS Publication 544 is the reference for how property is classified and how sales are reported. If you run a practice and are deciding what to expense, our guide to medical equipment deductions covers what qualifies in the first place. The recapture exposure follows every dollar you deduct.
Section 1245 vs. 1250 vs. 1231
These three sections are often confused because they all touch the same sale. They do different jobs.
| Feature | Section 1245 | Section 1250 | Section 1231 |
|---|---|---|---|
| What it covers | Depreciable personal property and certain other assets | Depreciable real property, such as buildings and structural components | Gain or loss on business property held more than one year |
| Typical examples | Equipment, vehicles, furniture, machinery | Rental buildings, commercial buildings | Net result after recapture is carved out |
| Recapture treatment | Depreciation taken is ordinary income, up to the gain | Ordinary income only for depreciation beyond straight-line, which is uncommon today | Applies to what remains after recapture |
| Rate on depreciation portion | Your ordinary rate | Unrecaptured Section 1250 gain, maximum 25% | Generally long-term capital gain treatment on net gains |
| Where reported | Form 4797, Part III | Form 4797, Part III, then Schedule D worksheets | Form 4797, Part I |
The order is what matters. Recapture is computed first, then whatever gain remains flows to Section 1231. Think of Section 1245 as the step that takes back ordinary income before the capital-gain treatment is available.
How Section 1250 differs
Buildings are generally depreciated on a straight-line basis, so full ordinary-income recapture rarely applies to them. Instead, the depreciation you took is what the IRS calls unrecaptured Section 1250 gain: depreciation on real property held long term that was not recaptured as ordinary income and is generally taxed at a maximum 25% rate. The IRS publishes dedicated worksheets to separate that portion from your other capital gains.
So the same dollar of depreciation can cost you ordinary rates on a truck and up to 25% on a rental building. For owners holding both, such as an operator who owns the building their business occupies, the mix of assets in the sale price drives the final bill. Our article on real estate depreciation recapture walks through the building side in detail.
A worked example
This example is illustrative, not a client result.
Say you run a commercial cleaning company. Three years ago you bought a floor-scrubbing machine and a service van for $90,000 combined and deducted all of it in year one through bonus depreciation or Section 179. Your adjusted basis is now $0. You sell both for $60,000.
| Step | Amount |
|---|---|
| Amount realized | $60,000 |
| Adjusted basis | $0 |
| Gain | $60,000 |
| Total depreciation taken | $90,000 |
| Recapture (lesser of gain or depreciation) | $60,000 |
| Remaining Section 1231 gain | $0 |
The entire $60,000 is ordinary income. It is taxed at your marginal rate, not at a capital gain rate.
Now change the sale price to $100,000, which can happen with a high-demand vehicle or specialized equipment. Gain is $100,000. Recapture is the lesser of $100,000 and $90,000, so $90,000 is ordinary income, and the remaining $10,000 is Section 1231 gain.
The lesson: after aggressive first-year deductions, nearly all of a sale price can come back as ordinary income. That is not a reason to skip the deduction. You still got the benefit years earlier, and the sale simply settles the account. It is a reason to know the number in advance.
What rate applies
Recapture is added to your other income and taxed at ordinary rates. For 2026, the IRS tax-rate tables keep the 10%, 12%, 22%, 24%, 32%, 35%, and 37% brackets, with the 0% and 15% capital-gain thresholds adjusted for inflation. A large recapture gain in a year when your income is already high can push part of it into the top brackets.
Two more layers deserve a check:
- Net investment income tax. The 3.8% NIIT may apply to gains from property dispositions when modified adjusted gross income exceeds the thresholds on Form 8960. Whether it reaches a sale of business assets depends on whether you materially participate in the business, so confirm that with your preparer before assuming either way.
- State tax. Most states tax recapture as ordinary income. Idaho and Oregon owners should confirm how their state treats the sale.
If you are comparing how gains are taxed across property types, this overview of how to reduce capital gains tax on real estate is a useful companion for the real-property side. Remember that it addresses capital gains, while Section 1245 recapture is ordinary income.
How to report recapture on Form 4797
Form 4797 is the form for sales of business property. The IRS instructions direct you to use Part III of Form 4797 to figure the ordinary-income recapture. In practice the flow looks like this:
- List each asset in Part III. Description, date acquired, date sold, sales price, and the depreciation allowed or allowable.
- Compute the gain. Sales price minus adjusted basis, per asset.
- Apply the recapture limit. The regulations compute recapture separately for each item, though you may group units in a depreciation account when it is reasonably clear the result is not less than separate computation.
- Carry the ordinary portion forward. It goes to Part II as ordinary gain, and it flows to your return as ordinary income.
- Carry any remainder to Part I. This is the Section 1231 gain, which receives different treatment.
If you also sold the business as a whole, the sale price must be allocated across asset classes. The IRS has a presentation on Form 4797 and allocation of sales price that explains why that allocation changes the tax result. A dollar assigned to equipment is taxed differently from a dollar assigned to goodwill, so negotiate the allocation before closing, not after.
Exchanges, gifts, and death
Not every transfer triggers recapture right away.
Exchanges. Property exchanged rather than sold may qualify for nonrecognition treatment, which can defer the recapture. Publication 544 explains that if you receive boot, meaning non-like-kind property, the gain up to the boot can still trigger recapture. Since the 2018 tax law change, like-kind exchange treatment applies to real property only, so exchanges of equipment no longer defer tax. For the real estate side, see our primer on 1031 exchanges for Idaho investors, and if timing is tight, the rules for a reverse 1031 exchange.
Transfers at death. A transfer of a decedent's property to an executor, heir, or beneficiary is not a disposition that produces taxable gain, so recapture is not triggered by the transfer itself.
Planning before you sell
The recapture bill is largely set by decisions made before closing day. These are the levers we look at first with owners.
Time the sale against your income
Because recapture is stacked on top of your other income, a year with a low-income stretch, a large operating loss, or a planned retirement contribution can lower the rate it faces. Spreading an installment sale across years can also help, though recapture income is generally recognized in the year of sale even if payments are deferred, so check the mechanics first.
Negotiate the purchase price allocation
In a business sale, the buyer and seller both file allocations. Assigning more of the price to assets that do not carry recapture can reduce your ordinary income, but the buyer usually wants the opposite, since faster-depreciating assets help them. Our business sale tax planning playbook covers how to approach that negotiation.
Weigh the deduction against the exit
Bonus depreciation is a strong tool, and the current rules are laid out in our guide to bonus depreciation in 2026. The point is to use it with the exit in mind. If you expect to hold equipment until it is worthless, recapture is a non-issue. If you plan to sell in two or three years, model the sale up front. The same applies to short-term rental bonus depreciation, where the property mix includes both personal property and building components.
Watch method changes
If you fix a depreciation mistake or change methods, the catch-up adjustment can interact with recapture. Our explainer on the Section 481(a) adjustment covers the four-year rule.
Keep clean records
Recapture depends on depreciation allowed or allowable, so missing records can cost you. Keep purchase invoices, placed-in-service dates, prior Form 4562 filings, and a fixed-asset ledger that reconciles to your return.
Perspective: why we model the exit on day one
We see recapture surprise good business owners every year. The pattern is almost always the same: a strong deduction in year one, a sale or trade-in a few years later, and a tax bill nobody priced in.
Our view is that recapture is not a reason to avoid depreciation. It is a reason to plan it as a two-part decision. The deduction helps you now. The sale settles the account later. When both are modeled together, you can choose the right method, the right entity holding the asset, and the right year to sell.
That matters most for owners with several entities, S-corporations that hold equipment, and real estate investors who mix building and equipment depreciation in the same property. A custom-built plan that tracks each asset from purchase to sale is how we try to keep more of what you earn.
Solo and partnership practices build income. S Corps help you keep more of it. Good recapture planning is part of how that happens.
Melissa
Work with us on your sale or your depreciation plan
If you are planning an equipment sale, a business exit, or a large purchase that you intend to depreciate, we can model the recapture before it lands on your return. Our Quarterly Tax Strategy Sessions are $9,497 per year, and Monthly Tax Advisory is $11,997 per year, both built for owners who want planning all year rather than a once-a-year conversation. If you own an S-corporation, the S-Corp Tax Strategy Accelerator is $997 one-off. Partnership and S-corporation returns (Form 1065 and Form 1120-S) are $1,800 each, as shown on our fee schedule.
To see how we work, start at The Tax Refinery.
FAQ
Is Section 1245 recapture taxed as ordinary income or capital gain?
It is taxed as ordinary income. The amount recaptured is the lesser of the depreciation you took or the gain on the sale. Any gain above that amount is usually Section 1231 gain, which can receive capital gain treatment.
What is the difference between Section 1245 and Section 1250 property?
Section 1245 property is generally depreciable personal property, such as equipment and vehicles. Section 1250 property is depreciable real property, such as buildings. Depreciation on 1245 property is recaptured as ordinary income, while depreciation on real property held long term is generally taxed at a maximum 25% rate as unrecaptured Section 1250 gain.
Where do I report Section 1245 recapture?
On Part III of Form 4797, which is where you figure the ordinary-income portion of the gain. The result flows to Part II as ordinary gain, and any remaining gain goes to Part I as Section 1231 gain.
Can the net investment income tax apply to depreciation recapture?
It can. The 3.8% tax may apply to gains from property dispositions when your modified adjusted gross income is over the Form 8960 thresholds. Whether it applies to a sale of business assets often depends on how involved you are in running the business, so confirm this with your tax preparer.
Sources
- 26 CFR § 1.1245-1, General rule for treatment of gain
- 26 U.S. Code § 1245, Gain from dispositions of certain depreciable property
- IRS Publication 544 (2025), Sales and Other Dispositions of Assets
- Instructions for Schedule D (Form 1041) (2025)
- Rev. Proc. 2025-32, 2026 tax-rate tables
- 2026 Form 8960, Net Investment Income Tax
- 2025 Instructions for Form 4797
- IRS presentation: Form 4797, Sale of Business Property, Allocation of Sales Price and Tax Planning
- How to reduce capital gains tax on real estate