Section 1245 Property: A Real Estate Investor’s Tax Guide

Abstract

What is a Section 1245 Property? According to the Internal Revenue Service Code, the definition of a Section 1245 property is any property classified as an intangible or tangible personal property and subject to depreciation or amortization. You own a Section 1245 property if: Examples of Section 1245 Property Now that we've explored the definition of Section 1245 property let's dive a little deeper into what this property can look like. To get a better idea of what type of property can be considered Section 1245 property, let's explore a few examples of assets that could be considered Section 1245 properties: Business vehicle Machines that are used to manufacture products Blast furnaces Storage bins for grain Copyright or Trademarks Patents Examples of Non-Section 1245 Property While we've looked at a few examples of Section 1245 property outside of the real estate scope, it's important to differentiate these unique assets from other property items that might cause confusion. You may have to pay additional taxes on your 1245 property if all of the following apply: You sell the property for a gain Depreciation was taken on the property You held the property for more than a year If those three rules apply, then you'll have to pay depreciation recapture. If you sell the property for a loss, then you won't have to pay depreciation recapture at all-the property reverts to a 1231 property and, like other ordinary losses, is subject to netting and lookback. The Difference Between a 1245 Property & 1250 Property A common source of confusion when filing taxes and calculating if a property has depreciated is the difference between Section 1245 and 1250 property. Section 1250 property is classified as assets that consist of real property used for business purposes over 12 months that are subject to depreciation that is not considered 1245 property.