Section 1245 Recapture: Equipment, Section 179 and Business Sales
Section 1245 recapture turns the gain on equipment and similar property back into ordinary income, up to the depreciation you took. If you sell a machine, a truck, furniture or cost-segregated building components for more than their depreciated basis, the gain up to your prior depreciation (including Section 179 and bonus depreciation) is taxed at ordinary rates, up to 37% federally (IRC §1245(a)(1)). And it is taxed in the year of sale, even if the buyer pays you over ten years (§453(i)).
For owners selling a business, this is often the biggest surprise on the closing-year tax bill. This page covers what counts as Section 1245 property, how the recapture is computed, how Section 179 is recaptured, why an installment sale cannot defer it, and two worked examples. To see how recapture changes your own sale, run the calculator.
What is Section 1245 property?
Section 1245 property is depreciable property that is either personal property or certain other tangible property, generally not a building or its structural components (§1245(a)(3)). In plain English:
| Usually Section 1245 property | Usually not Section 1245 property |
|---|---|
| Machinery and equipment | Buildings and structural components (Section 1250 property) |
| Vehicles, trucks, trailers | Land (not depreciable at all) |
| Furniture, fixtures, computers | Goodwill you created yourself (no amortization taken) |
| Cost-segregated 5 and 7-year components of a building (carpet, appliances, cabinets, some fixtures) | Inventory (taxed as ordinary income under different rules) |
| Amortized intangibles you bought, such as a purchased customer list |
Three points trip people up. First, cost segregation reclassifies parts of a building (carpet, cabinets, certain electrical) into short-life Section 1245 property. When you sell the building, those components come out as ordinary recapture, not as unrecaptured §1250 gain capped at 25%. Second, fifteen-year land improvements (paving, landscaping) are generally Section 1250 property, but any depreciation on them beyond straight line, including bonus, comes back as ordinary §1250 recapture in the year of sale. Third, Section 1245 property includes intangibles you amortized, because §1245(a)(2) adds back amortization as well as depreciation.
How Section 1245 recapture is calculated
The rule in §1245(a)(1) is short. The ordinary income is the amount by which the lower of:
- the property's recomputed basis (your adjusted basis plus all depreciation and amortization "allowed or allowable"), or
- the amount realized on the sale,
exceeds your adjusted basis.
In practice that works out to three steps:
- Gain = amount realized minus adjusted basis.
- Recapture = the smaller of the gain or the total depreciation taken (including Section 179 and bonus).
- Anything left (gain above your original cost) is Section 1231 gain, which is usually taxed as long-term capital gain.
"Allowed or allowable" matters. If you skipped depreciation you were entitled to, the IRS still reduces your basis by the depreciation you could have taken, and recapture is computed on that amount unless you can show a smaller amount was actually allowed (§1245(a)(2)(B)).
The 1245 recapture tax rate
There is no special rate. Section 1245 recapture is ordinary income, stacked on top of your wages, business income and everything else, and taxed at your regular bracket. In 2026 the federal brackets for a married couple filing jointly run from 10% to 37%, with the 37% bracket starting above $768,700 of taxable income (Rev. Proc. 2025-32).
Compare the three layers a seller can face:
| Type of gain | Federal rate | Timing on an installment sale |
|---|---|---|
| §1245 recapture (equipment, cost-seg parts) | Ordinary, up to 37% | Year of sale, in full (§453(i)) |
| Unrecaptured §1250 gain (building depreciation) | Ordinary, capped at 25% | As payments arrive (Reg. §1.453-12) |
| §1231 / long-term capital gain | 0%, 15% or 20% | As payments arrive |
If the business is a passive activity for you, the gain is generally also net investment income subject to the 3.8% NIIT. If you materially participated, gain on the business's operating assets is generally outside the NIIT. Your CPA should confirm which side you are on.
Simple example: equipment sold at a gain
Simple example. Married filing jointly, $100,000 of other ordinary income, 2026 standard deduction of $32,200, 2026 federal brackets. Federal income tax only.
You bought equipment for $400,000 and expensed all of it with Section 179 and bonus depreciation. Adjusted basis: $0. You sell it for $150,000.
- Gain: $150,000 - $0 = $150,000
- Depreciation taken: $400,000
- Recapture: the smaller of $150,000 or $400,000 = $150,000, all ordinary income
| Taxed as ordinary (§1245) | If it had been long-term capital gain | |
|---|---|---|
| Extra federal tax on the $150,000 | $29,828 | $17,835 |
The difference, $11,993, is the cost of recapture on this sale. The long-term column is only for comparison. It shows why buyers and sellers argue about how much of a business price goes to equipment.
If instead you sold the same equipment for $450,000 (more than you paid), the first $400,000 of gain would be recapture and only the last $50,000 would be Section 1231 gain.
Section 179 recapture: two different triggers
Section 179 lets you expense qualifying property in the year you place it in service. That deduction can come back in two ways.
1. When you sell the property. Section 1245(a)(2)(C) treats a Section 179 deduction as if it were amortization for recapture purposes. So the full expensed amount is in the "depreciation taken" column above, and gain up to it is ordinary income.
2. When business use drops to 50% or less. IRS Pub. 946 says you may have to recapture the Section 179 deduction if, in any year during the property's recovery period, business use drops to 50% or less. The recapture amount is the Section 179 deduction minus the depreciation that would have been allowable without it. You report it as ordinary income in Part IV of Form 4797 and increase the property's basis by the same amount. The statutory authority is §179(d)(10), which directs regulations to recapture the benefit for property "not used predominantly in a trade or business."
Pub. 946 is explicit that if you sell the property, you do not use the business-use calculation. You use the Section 1245 rules instead.
Bonus depreciation follows the same pattern on a sale. Pub. 946 states that on a disposition, gain is generally recaptured as ordinary income up to the special depreciation allowance previously allowed or allowable.
California note. California caps Section 179 at $25,000 and does not follow federal bonus depreciation (Cal. R&TC §17250(a)(11)). Your California basis in the same equipment is usually higher than your federal basis, so your California gain and recapture are usually smaller. Your preparer tracks the two sets of books separately.
Why an installment sale cannot defer Section 1245 recapture
Seller financing spreads gain over the years you are paid. Recapture is the exception. Section 453(i)(1) says "any recapture income shall be recognized in the year of the disposition," and only gain in excess of the recapture income goes on the installment method. Recapture income means the amount that would be ordinary under §1245 or §1250 if all payments were received in the year of sale (§453(i)(2)).
Simple example. In a business sale, $150,000 of the price is allocated to fully depreciated equipment. The buyer pays 20% down and the rest over seven years on a seller-financed note. You receive about $30,000 of cash that can be traced to the equipment in year one, but you report all $150,000 of recapture as ordinary income in year one. The recapture is added to your basis for the installment computation, so it is not taxed a second time when the principal arrives.
That timing gap is a cash-flow problem, not just a tax problem. Plan the down payment so it covers the year-one tax on recapture. The installment sale depreciation recapture guide walks through the Form 6252 and Form 4797 mechanics.
Section 1245 recapture in a business sale
In an asset sale, the price is allocated among the assets under §1060 and reported by both sides on Form 8594. Equipment, vehicles and furniture are Class V assets. Goodwill and going concern value are Class VII, the residual.
The buyer usually wants more of the price on equipment, because the buyer can depreciate it quickly. You usually want less on equipment, because every dollar there up to your prior depreciation is ordinary income in year one. A written allocation both sides sign is generally binding on both (§1060(a)), so negotiate it before you sign. The full picture of how each asset in a business is taxed is in selling a business: tax implications.
Cost segregation and 1031 exchanges
Owners who used cost segregation on a building get the benefit early and pay it back at sale. The 5- and 7-year components are Section 1245 property, so gain on them is ordinary recapture in the year of sale, even on an installment sale. Fifteen-year land improvements are Section 1250 property, but depreciation on them beyond straight line (including bonus) is ordinary recapture under §1250(a) and is also taxed in year one under §453(i). The Waterfall Strategy's guide to cost segregation before selling runs the numbers.
A 1031 exchange does not automatically shelter Section 1245 recapture. Under §1245(b)(4), recapture in an exchange is limited to the gain recognized plus the fair market value of non-Section 1245 property you acquire. If you trade a cost-segregated building for a replacement that is all building and land (Section 1250 property), you can owe recapture with no cash boot. The fix is to acquire at least as much Section 1245 value in the replacement, usually supported by a cost segregation study on the new property. For the broader picture of recapture on rental property, see depreciation recapture explained.
How it is reported
Section 1245 recapture is figured in Part III of Form 4797 and flows to Part II as ordinary income. On an installment sale, the recapture from Form 4797 is also entered on Form 6252 so it is added to basis and not taxed twice. Section 179 recapture from a drop in business use goes in Part IV of Form 4797. The Waterfall Strategy has a line-by-line walkthrough of Form 4797.
Bottom line
Section 1245 recapture is the part of your gain that simply gives back the depreciation, Section 179 and bonus you took on equipment and similar property. It is ordinary income, taxed up to 37%, and it lands in the year of sale no matter how you are paid. You cannot finance your way around it. You can plan for it: negotiate the price allocation, size the down payment to cover it, and time other income around the sale year. Model the year-one hit before you sign using the calculator, and read the free book for how sellers time gain against losses.
Questions to ask your CPA
- How much depreciation, Section 179 and bonus have I taken on each asset I am selling, federal and state?
- How much of my gain is Section 1245 recapture, and how much is Section 1231 gain?
- What price allocation does the buyer want, and what does each $100,000 moved to equipment cost me?
- Does my down payment cover the year-one tax on recapture if I carry a note?
- Am I a material participant, or will the gain also be subject to the 3.8% NIIT?
- Did any Section 179 property drop to 50% or less business use before the sale?
- If I exchange instead, how much replacement Section 1245 property do I need to avoid recapture under §1245(b)(4)?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.