§1245 Property Overview
Section 1245 property is mainly depreciable personal property and certain other listed property. When it is sold, gain up to prior depreciation is generally taxed as ordinary income. Most short-lived components in a cost segregation study fall here. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- §1245 property includes depreciable personal property and certain other listed property.
- On sale, gain up to the lower of recomputed basis or amount realized is generally ordinary income.
- Recomputed basis is adjusted basis plus prior depreciation and amortization, including §179.
- Most short-lived components identified in a cost segregation study are §1245 property.
- Qualified production property under §168(n) is listed as §1245 property.
Section 1245(a)(3) defines §1245 property as property that is or has been of a character subject to the §167 allowance and that is either personal property, or certain other listed property. The other listed categories include tangible property (other than a building or its structural components) used as an integral part of manufacturing, production, extraction, or specified utility services, or as a research or bulk-storage facility used in connection with those activities; so much of other real property as reflects certain amortization or §179 adjustments; single-purpose agricultural or horticultural structures; petroleum storage facilities that are not buildings; railroad grading or tunnel bore; and — added by Public Law 119-21 — qualified production property under §168(n).
When §1245 property is disposed of, §1245(a)(1) treats as ordinary income the gain up to the lower of its recomputed basis or the amount realized (or fair market value, for a disposition that is not a sale, exchange, or involuntary conversion). Recomputed basis is adjusted basis plus all depreciation or amortization adjustments reflected in that basis, whether allowed to the taxpayer or to another person. If the taxpayer can show that the amount allowed was less than the amount allowable, only the amount allowed is added back.
Any deduction allowable under §179 and several related expensing provisions is treated as amortization for this purpose. Expensing an item under §179 does not remove it from recapture. It increases the amount that can be recaptured as ordinary income on a later disposition.
In a cost segregation study, moving cost from the building into 5-year and 7-year personal-property classes usually means moving cost into §1245 property. That speeds up deductions. It also means more of the gain on a later sale may be ordinary income. The IRS Cost Segregation Audit Techniques Guide lists identification of §1245 property as one of the elements of a quality study. The ATG is examiner guidance, not law, and cannot be cited as authority.
This page is educational information, not tax advice. The effect of recapture depends on holding period, sale price, and the taxpayer’s other items. A CPA can estimate it before a study or a sale is decided.
Why it matters for cost segregation
Cost segregation does not create extra lifetime depreciation. It changes when deductions are taken and, on exit, the character of gain. Personal property that was recovered over five or seven years, or expensed, is generally recaptured as ordinary income to the extent of depreciation taken.
That tradeoff is one reason a study should identify §1245 property as such, not merely as “5-year.” The class and the recapture category are related but not identical. Some §1245 property is real property used as an integral part of manufacturing. Some 15-year land improvements are §1250 property.
A complete comparison looks at both timing and character. Presenting only the first-year deduction without mentioning recapture would be incomplete educational copy.
Exceptions
Section 1245(b) provides exceptions, including gifts, transfers at death (except as provided in §691), and certain tax-free exchanges and reorganizations under §§332, 351, 361, 721, and 731, limited to gain otherwise recognized. Like-kind exchanges and involuntary conversions under §§1031 and 1033 have their own recognition limits.
Partnership distributions and transfers to tax-exempt organizations that will use the property in an unrelated trade or business have special rules. Whether an exception applies depends on the transaction.
This page does not apply those exceptions to any reader’s sale, gift, or exchange. That is a CPA or tax-attorney determination.
Qualified production property
Public Law 119-21 added qualified production property, as defined in §168(n)(2), as §1245(a)(3)(G). If a taxpayer elects the §168(n) allowance, the portion of nonresidential real property treated as QPP is §1245 property for recapture.
The statute also provides a 10-year recapture period if the use of that property changes. Notice 2026-16 is interim guidance. This page does not decide whether any building is QPP.
Treating QPP as §1245 property is a statutory classification, not a cost-segregation conclusion. A study of a manufacturing building and a §168(n) election are separate analyses.
Professional judgment
Identification of §1245 property in a building is fact-specific. Treas. Reg. §1.48-1 and Hospital Corporation of America supply the personal-property and structural-component tests that studies still use. Item results in one case are not a rule for another building.
The ATG’s quality-study list is useful as a description of what examiners look for. It is not an IRS approval of any study format or preparer.
Exit planning, installment sales, and entity-level dispositions can change how recapture appears on a return. Those topics are outside this overview.
Sources
- 1
- 2IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
- 3Public Law 119-21 (July 4, 2025), §§70301, 70306, 70307(opens in a new tab)
The 2025 reconciliation law, which the IRS describes as commonly known as the One, Big, Beautiful Bill Act.