When property that is subject to depreciation or amortization is sold or disposed of at a gain, part or all of the gain may have to be reported as ordinary income. The part of the gain that represents depreciation or amortization that was taken as a deduction, or could have been taken as a deduction, up until the time of the sale or disposal is the amount that must be recaptured as ordinary income.
Gains or losses from these sales or dispositions are reported in Part III of Form 4797, and include different types of property referred to according to the Internal Revenue Code sections that define their tax treatment.
Section 1245 Property
This is the case with property referred to as Section 1245 property. This type of property includes tangible personal property, such as furniture and equipment, that is subject to depreciation, or intangible personal property, such as a patent or license, that is subject to amortization.
Section 1245 property also includes certain other tangible property that is an integral part of a manufacturing, production, or extraction facility, certain infrastructure, and related research and storage facilities. Other capitalized costs subject to amortization, such as pollution control facilities, childcare facilities, the removal of barriers to disabled and elderly persons, and reforestation costs are also included in section 1245 property. But section 1245 property does not include buildings and structural components.
When section 1245 property is sold or disposed of at a gain, the part of the gain that represents recaptured depreciation or amortization is treated as ordinary income. Then, any gain remaining after that is treated as section 1231 property, for purposes of determining whether the remaining part of the gain is ordinary or capital gain. If the amount of recaptured depreciation or amortization is more than the gain on the sale or disposition, the entire amount of the gain is reported as ordinary income.