Business Tax Preparation · Business assets

Disposition of property or assets

Selling a business asset raises two questions in a fixed order, and taking them in the wrong order gives the wrong answer. How much gain, and what kind. The second is decided by three provisions that operate in sequence, and the recapture rules run before the netting rather than after it.

The rule

The amount. gain is the excess of the amount realised over the adjusted basis for determining gain, and loss is the excess of the adjusted basis for determining loss over the amount realised^TY2026 (IRC § 1001(a)), where the sum of any money received plus the fair market value of any property other than money received — excluding a reimbursement of real property taxes IRC § 164(d) treats as imposed on the purchaser, and including taxes it treats as imposed on the taxpayer that the purchaser is to pay^TY2026 (IRC § 1001(b)).

Recapture first. on a disposition of IRC § 1245 property, the excess of the lower of recomputed basis or the amount realised (or fair market value on a disposition that is not a sale) over adjusted basis is ordinary income, recognised notwithstanding any other provision of the subtitle^TY2026 (IRC § 1245(a)(1)) for property which is or has been of a character subject to the allowance for depreciation and is either personal property, or other tangible property, not including a building or its structural components, used as an integral part of manufacturing, production or extraction or of furnishing transportation, communications, utilities or sewage services, or as a research or bulk storage facility connected with those activities^TY2026 (IRC § 1245(a)(3)); and on a disposition of IRC § 1250 property, the applicable percentage of the lower of the additional depreciation attributable to periods after 31 December 1975 or the excess of the amount realised over adjusted basis is ordinary income^TY2026 (IRC § 1250(a)(1)(A)) for depreciable realty.

Then the netting. property used in the trade or business of a character subject to the allowance for depreciation, and real property used in the trade or business, in each case held for more than 1 year — excluding inventory, property held primarily for sale to customers, self-created intangibles of the kind described in IRC § 1221(a)(3), and certain government publications^TY2026 (IRC § 1231(b)(1)), and where the IRC § 1231 gains for the year exceed the IRC § 1231 losses, all of them are treated as long-term capital gains and losses; where they do not, all are treated as ordinary^TY2026 (IRC § 1231(a)).

Then the lookback. net IRC § 1231 gain is treated as ordinary income to the extent of the non-recaptured net IRC § 1231 losses — the aggregate net losses of the 5 most recent preceding taxable years, less any already recaptured^TY2026 (IRC § 1231(c)).

And a rate, not a character. the long-term capital gain that would have been ordinary income if IRC § 1250(b)(1) included all depreciation and the IRC § 1250(a) applicable percentage were 100 percent — taxed at its own rate rather than the ordinary rate or the general capital gains rate^TY2026 (IRC § 1(h)(6)(A)).

Current figures

How it works in practice

Compute the gain, then take the character in three steps. Recapture under IRC § 1245 or IRC § 1250 comes off first and is ordinary. Whatever is left is a IRC § 1231 gain and goes into the netting. Whatever survives the netting as a net gain then meets the IRC § 1231(c) lookback. Reversing any two of those changes the answer, and questions in this area are usually built on exactly that.

IRC § 1231 is a one-way bet, which is why it is policed. where the IRC § 1231 gains for the year exceed the IRC § 1231 losses, all of them are treated as long-term capital gains and losses; where they do not, all are treated as ordinary^TY2026 (IRC § 1231(a)). A net gain is long-term capital gain; a net loss is ordinary. The taxpayer gets the favourable rate on gains and the unlimited deduction on losses. net IRC § 1231 gain is treated as ordinary income to the extent of the non-recaptured net IRC § 1231 losses — the aggregate net losses of the 5 most recent preceding taxable years, less any already recaptured^TY2026 (IRC § 1231(c)) is the price: a net gain is ordinary to the extent of net IRC § 1231 losses deducted in the five preceding years and not already recaptured.

Note what the lookback does not do. It does not disallow anything and it does not reach back to amend earlier years. It changes the character of the current year’s gain, and the pool of recapturable losses is a rolling five-year window that empties as it is used.

IRC § 1245 recaptures everything. on a disposition of IRC § 1245 property, the excess of the lower of recomputed basis or the amount realised (or fair market value on a disposition that is not a sale) over adjusted basis is ordinary income, recognised notwithstanding any other provision of the subtitle^TY2026 (IRC § 1245(a)(1)). For personal property, all the depreciation ever taken comes back as ordinary income to the extent of the gain. Because bonus depreciation and IRC § 179 now write most equipment off immediately, adjusted basis is usually zero and the whole sale price is ordinary income — the entire gain, not a portion of it.

IRC § 1250 recaptures almost nothing. on a disposition of IRC § 1250 property, the applicable percentage of the lower of the additional depreciation attributable to periods after 31 December 1975 or the excess of the amount realised over adjusted basis is ordinary income^TY2026 (IRC § 1250(a)(1)(A)) reaches only “additional depreciation,” meaning the excess of accelerated over straight line. Real property placed in service after 1986 is depreciated straight line under IRC § 168, so there is no additional depreciation and IRC § 1250(a) recaptures nothing at all on almost every building a business will sell.

What fills the gap is a rate rather than a recapture. the long-term capital gain that would have been ordinary income if IRC § 1250(b)(1) included all depreciation and the IRC § 1250(a) applicable percentage were 100 percent — taxed at its own rate rather than the ordinary rate or the general capital gains rate^TY2026 (IRC § 1(h)(6)(A)). The straight line depreciation that IRC § 1250 does not recapture is still long-term capital gain, but it is taxed at its own rate rather than at the general capital gains rate. For a non-corporate taxpayer this is where the depreciation on a building comes home, and it is easy to miss because nothing on the face of IRC § 1250 produces it.

The definition of IRC § 1231 property excludes what a dealer holds. property used in the trade or business of a character subject to the allowance for depreciation, and real property used in the trade or business, in each case held for more than 1 year — excluding inventory, property held primarily for sale to customers, self-created intangibles of the kind described in IRC § 1221(a)(3), and certain government publications^TY2026 (IRC § 1231(b)(1)). Inventory and property held primarily for sale to customers are out, as are self-created intangibles held by their creator. So a builder’s houses are ordinary income on sale however long they are held, and a landlord’s building is IRC § 1231 property after a year.

Amount realised is more than the cash. the sum of any money received plus the fair market value of any property other than money received — excluding a reimbursement of real property taxes IRC § 164(d) treats as imposed on the purchaser, and including taxes it treats as imposed on the taxpayer that the purchaser is to pay^TY2026 (IRC § 1001(b)). Debt the buyer assumes or takes subject to is part of it, and the property tax adjustments follow IRC § 164(d) rather than the contract — the same rule that governs the purchaser’s basis, read from the other side.

How this has changed

None of IRC §§ 1001, 1231, 1245 or 1250 was amended by Pub. L. 119-21, so the 2026 rules are the 2025 rules. What has changed is how often each of them bites, and the change is entirely a consequence of provisions on other pages.

IRC § 1245 now reaches almost every equipment sale in full. Before 2017, equipment was depreciated over its recovery period and a sale part way through produced a mixture of recapture and IRC § 1231 gain. Since Pub. L. 115-97 raised expensing and bonus depreciation, and Pub. L. 119-21 § 70301 made the full bonus allowance permanent, adjusted basis is usually zero from the first year. The consequence is that the whole sale price is ordinary income under IRC § 1245(a)(1), and there is nothing left for IRC § 1231 to net.

That is worth stating plainly to a client, because it is the delayed cost of the immediate deduction and it does not appear anywhere on the return in the year the deduction is taken.

IRC § 1250 has been largely inoperative since 1986. The Tax Reform Act of 1986 put real property onto straight line recovery under IRC § 168, and IRC § 1250(a) reaches only the excess of accelerated over straight line. The section remains in the Code and is regularly cited, but on a building placed in service after 1986 it produces nothing. What people mean when they say “IRC § 1250 recapture” is almost always the unrecaptured IRC § 1250 gain of IRC § 1(h)(6), which is a different thing in a different section and applies only to non-corporate taxpayers.

One live interaction to watch. A net IRC § 1231 loss is ordinary, so it feeds into the aggregate that IRC § 461(l) tests for a non-corporate taxpayer — and IRC § 461(l) became permanent in July 2025. A year of large equipment disposals at a loss can therefore run into the excess business loss limitation, and the loss that survives becomes a net operating loss subject to the IRC § 172(a)(2) cap. The character rules on this page decide what enters that computation.

Exam focus

Take the three steps in order and say them: recapture, netting, lookback. Most questions in this area supply facts for all three and are testing the sequence.

Know that IRC § 1245 recaptures all depreciation to the extent of gain, and that IRC § 1250 recaptures only additional depreciation, which post-1986 realty does not have.

Know that unrecaptured IRC § 1250 gain is a rate applied to long-term capital gain, that it is non-corporate, and that it is not produced by IRC § 1250 at all.

Finally, know the lookback as five years, rolling, and applying only to a net IRC § 1231 gain.

Check yourself

1. A business sells fully expensed machinery for $70,000. What is the character of the gain?

Answer: Ordinary income in full. on a disposition of IRC § 1245 property, the excess of the lower of recomputed basis or the amount realised (or fair market value on a disposition that is not a sale) over adjusted basis is ordinary income, recognised notwithstanding any other provision of the subtitle^TY2026 (IRC § 1245(a)(1)) — adjusted basis is nil, the lower of recomputed basis and the amount realised is $70,000, and the whole excess over adjusted basis is ordinary. Nothing reaches IRC § 1231.

2. A company sells a warehouse placed in service in 2005 at a $400,000 gain, having taken $150,000 of straight line depreciation. How much does IRC § 1250 recapture?

Answer: Nothing. on a disposition of IRC § 1250 property, the applicable percentage of the lower of the additional depreciation attributable to periods after 31 December 1975 or the excess of the amount realised over adjusted basis is ordinary income^TY2026 (IRC § 1250(a)(1)(A)) reaches only additional depreciation — the excess of accelerated over straight line — and a post-1986 building has none. For a non-corporate seller, the long-term capital gain that would have been ordinary income if IRC § 1250(b)(1) included all depreciation and the IRC § 1250(a) applicable percentage were 100 percent — taxed at its own rate rather than the ordinary rate or the general capital gains rate^TY2026 would treat $150,000 of the gain as unrecaptured IRC § 1250 gain taxed at its own rate.

3. A business has $90,000 of IRC § 1231 gains and $140,000 of IRC § 1231 losses this year. How are they treated?

Answer: All as ordinary. where the IRC § 1231 gains for the year exceed the IRC § 1231 losses, all of them are treated as long-term capital gains and losses; where they do not, all are treated as ordinary^TY2026 (IRC § 1231(a)(2)) — because the gains do not exceed the losses, none of them is treated as long-term capital, so the $50,000 net loss is an ordinary deduction.

4. A business with a $200,000 net IRC § 1231 gain this year deducted a $75,000 net IRC § 1231 loss three years ago. What is the character?

Answer: $75,000 ordinary and $125,000 long-term capital gain. net IRC § 1231 gain is treated as ordinary income to the extent of the non-recaptured net IRC § 1231 losses — the aggregate net losses of the 5 most recent preceding taxable years, less any already recaptured^TY2026 (IRC § 1231(c)) treats the net gain as ordinary to the extent of non-recaptured net IRC § 1231 losses from the five most recent preceding years.

5. A property developer sells a house it built and held for three years. Is the gain a IRC § 1231 gain?

Answer: No. property used in the trade or business of a character subject to the allowance for depreciation, and real property used in the trade or business, in each case held for more than 1 year — excluding inventory, property held primarily for sale to customers, self-created intangibles of the kind described in IRC § 1221(a)(3), and certain government publications^TY2026 (IRC § 1231(b)(1)(B)) excludes property held primarily for sale to customers in the ordinary course of the trade or business, so the gain is ordinary income regardless of the holding period.