The short answer
Section 1245 property is depreciable or amortizable property that is personal property, or one of a short list of other tangible assets that are not buildings or their structural components, as defined in section 1245(a)(3). When you dispose of it at a gain, the gain up to all depreciation allowed or allowable is ordinary income, not capital gain. In real estate it shows up as appliances, carpeting, furniture and other components a cost segregation study pulls out of the building.
At a glance
| What it covers | Depreciable personal property, plus listed tangible assets that are not buildings or structural components |
|---|---|
| Recapture | Gain up to all depreciation allowed or allowable is ordinary income |
| Installment sale | Recapture income is recognized in the year of sale |
| Section 1031 | Personal property is not real property, so it is outside the exchange |
The definition is in section 1245(a)(3), and real estate owners meet it mainly through personal property.
Section 1245(a)(3) lists personal property; other tangible property, excluding buildings and structural components, used as an integral part of manufacturing, production, extraction, transportation, communications or utility services; real property whose basis reflects certain amortization or section 179 deductions; single purpose agricultural or horticultural structures; and petroleum storage facilities, among others. Publication 544 restates the list.
For a landlord, the common items are the ones Publication 527 puts in the 5-year class: appliances, carpeting and furniture used in a residential rental activity. A cost segregation study reclassifies more of these out of the building, and each dollar moved into a short recovery class is a dollar that faces ordinary-income recapture rather than the 25% ceiling on building depreciation.
The test is about the asset's character, not the owner. Publication 544 says the property must be or have been subject to an allowance for depreciation or amortization, so a personal-use item is not section 1245 property until it is placed in service in a rental or business.
Worked example: recapture is capped by what the items sell for.
Under section 1245(a)(1), ordinary income is the lower of recomputed basis (adjusted basis plus all depreciation allowed or allowable) or the amount realized, minus adjusted basis. Hypothetical: a cost segregation study identified $100,000 of 5-year personal property in a rental, fully depreciated through bonus depreciation, so its adjusted basis is zero. At sale, $20,000 of the price is allocated to those items.
Recomputed basis is $100,000 and the amount realized is $20,000, so the lower figure, $20,000, less zero basis gives $20,000 of ordinary income. The other $80,000 of deductions is never recaptured as ordinary income because the items were sold for less than their cost. The allocation therefore matters, and both sides of the sale should support it. Run your own numbers with your CPA.
Where it bites: installment sales, exchanges and high brackets.
Section 453(i) requires recapture income to be recognized in the year of disposition even if the rest of the gain is reported on the installment method, so a seller-financed deal can produce tax without matching cash.
Since 2018, section 1031(a)(1) covers only real property, and Reg. section 1.1031(a)-3 defines that term by reference to land, inherently permanent structures and structural components. Items that are personal property under that test are sold, not exchanged, and their gain is recognized; see furniture in a furnished rental. Section 1245(b)(4) also limits recapture in a partly tax-free exchange to recognized gain plus the value of non-section 1245 property received.
For 2026 rates and the cost segregation trade-off, see section 1245 recapture on real estate and the buildings counterpart, section 1250 property.
Related questions
Is a building ever section 1245 property?
Generally no. Section 1245(a)(3)(B) excludes buildings and their structural components, which are section 1250 property instead, though some special-purpose structures appear in the 1245 list.
Once 1245, always 1245?
Publication 544 says that if section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property.
What happens to gain above the recapture amount?
Publication 544 says recognized gain beyond the ordinary income from depreciation is section 1231 gain, which can be taxed as long-term capital gain after netting.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. 1245, gain from dispositions of certain depreciable property (Cornell LII)
- IRS, Publication 544, Sales and Other Dispositions of Assets
- IRS, Publication 527, Residential Rental Property
- 26 U.S.C. 453, installment method (Cornell LII)
- 26 U.S.C. 1031 (Cornell LII)
- 26 CFR 1.1031(a)-3, definition of real property (Cornell LII)