Business personal property: Business personal property is property that is movable and is not attached to or associated with land. Intangible personal property includes types of property with no physical presence, such as trademarks, copyrights, and patents. Tangible business property: Tangible property used in business activities of transportation, communications, electricity, gas, water, or sewage disposal services can qualify as section 1245 property. It can also include research facilities and certain types of storage facilities.
Schedule 1245 property doesn’t include buildings and structural components such as windows, doors, light fixtures, and central air conditioning systems.
How Section 1245 Property Works
When you sell business assets (the IRS uses the term “property”), you have either a gain or loss, based on the difference between the adjusted basis of an asset and the amount you sold it for. The adjusted basis of an asset is the initial cost of the asset plus the value of any additions or improvements, or less any depreciation or casualty losses. If you sell an asset for more than the adjusted basis, you have a gain; if you sell it for less, you have a loss. Gains and losses on the sale of business property are usually taxed at the capital gains tax rate, but section 1245 property is an exception. If you sell a section 1245 asset at a gain, the government can recapture (recover) all or part of that gain from depreciation by taxing it at the ordinary income tax rate.
How Section 1245 Property Is Taxed
For example, if you purchase a section 1245 asset for $1,000, and the total depreciation is $200, the value of your property is $800. If you resell that asset for $900, you make $100 in profit. That $100 will be taxed at the ordinary income tax rate because it is recaptured depreciation. If you resell that asset for $1,100, you make $300 in profit. Out of the $300 you made in profit, $200 is taxed at the ordinary income tax rate because it is recaptured depreciation. The remaining $100 may be taxed as either ordinary income or capital gains. If you have held the asset for longer than a year, the remaining $100 will be taxed at the capital gains rate. If you have a loss on the sale of section 1245 property, the loss is taxed as an ordinary loss, not a capital loss.
Reporting Section 1245 Gains and Losses
You’ll have to first separate out gains and losses into short term (for assets held a year or less) and long term (held more than a year). If you are a sole proprietor, the capital gains tax rate you are subject to will most likely range from 0% to 15%, depending on your taxable income. The ordinary income tax rate is set on a scale from 10% to 35%, depending on your taxable income. Use Form 4797 Sales of Business Property to calculate the ordinary income part of the gain on section 1245 property. You may also have to report section 1245 property gains and losses, along with all other types of gains and losses, on Form 8949 Sales and Other Dispositions of Capital Assets. Then use Schedule D to calculate the total gain or loss from what you reported on Form 8949. You may also need to use Schedule D to report additional transactions not included on Form 8949.
