What does Section 1245 property refer to?

Section 1245 property refers to depreciable personal property and structures. This classification includes assets that are used in a trade or business and have been subject to depreciation. The key characteristic of Section 1245 property is that it generally encompasses tangible assets such as machinery, equipment, vehicles, and certain buildings that can be depreciated over time for tax purposes.

When Section 1245 property is sold, any gain realized is typically subject to ordinary income tax treatment to the extent of the accumulated depreciation taken on the property. This means that when you sell it for more than its adjusted basis (original cost minus accumulated depreciation), the gain is “recaptured” as ordinary income instead of being treated as capital gain.

On the other hand, other options do not fall under Section 1245 classifications. Real estate holdings, for example, usually fall under different tax treatment (like Section 1250 property for depreciation recapture rules). Intangible business assets might include patents or goodwill, which also do not qualify as Section 1245 property. Long-term investments in equities pertain to financial securities and stocks, which have a completely different classification in terms of capital gains. Understanding these nuances clarifies the importance of recognizing Section 1245 property correctly in tax scenarios