1245 depreciation recapture applies to gain (but not loss) on disposition of 1231 assets that are personalty, such as machinery or desks. The 1245 depreciation recapture rule states that gain from the sale of 1245 property is ordinary income to the extent the gain was created by depreciation deductions. Put another way, the portion of the gain recognized as ordinary income is the lesser of the gain to be recognized or the accumulated depreciation. Any remaining gain is 1231 gain.

There are three potential scenarios after disposition of 1245 property: the gain is created solely through depreciation deductions, the gain is due to both depreciation deductions and asset appreciation, or the asset is sold at a loss.

1250 property, also known as depreciable real property, such as an office building or a warehouse, is subject to 1250 depreciation recapture. When depreciable real property is sold at a gain, the amount of the gain recaptured as ordinary income is limited to the excess of accelerated depreciation over the amount that would have been deducted had the straight-line method of depreciation been used for depreciation. However, MACRS depreciation for realty has used straight-line depreciation for a number of years, so this provision only applies to buildings that have been in use for many years.

Instead, a modified version of 1250 depreciation recapture applies only for corporations. This modified version, called 291 depreciation recapture, requires corporations that sell depreciable real property to recapture as ordinary income 20% of the lesser of the recognized gain or the accumulated depreciation.

1. Since you may be faced with this question during your professional career, give the answer you would give to a client.
2. Why do you believe Congress approved Sections 1245 and 1250 depreciation recapture?