What Is the Section 1245 Recapture Rule

Section 1245 recaptures depreciation or amortization allowed or allowable on tangible and intangible personal property at the time a business sells such property at a gain. Section 1245 taxes the gain at ordinary income rates to the extent of its allowable or allowed depreciation or amortization.

How is Section 1245 recapture calculated?

Section 1245 recapture is computed as the lesser of: (1) allowable depreciation or amortization on the disposed assets, or (2) the gain realized upon the disposition.

How do you avoid depreciation recapture on rental property?

Investors may avoid paying tax on depreciation recapture by turning a rental property into a primary residence or conducting a 1031 tax deferred exchange. When an investor passes away and rental property is inherited, the property basis is stepped-up and the heirs pay no tax on depreciation recapture or capital gains.