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Section 1245

Section 1245 of the Internal Revenue Code (IRC) is a provision that governs the taxation of gains from the sale of certain depreciable property. Depreciable property is property that has a useful life of more than one year and that is used in a trade or business or for the production of income. Section 1245 property includes real estate, machinery, equipment, and other tangible assets.

When depreciable property is sold, the gain on the sale is generally taxed as ordinary income. However, Section 1245 provides an exception to this rule for gains that are attributable to the depreciation that has been taken on the property. These gains are taxed at the same rate as capital gains, which is currently 15% or 20%, depending on the taxpayer's income.

The amount of gain that is taxed as ordinary income under Section 1245 is equal to the amount of depreciation that has been taken on the property. The remaining gain is taxed as a capital gain.

For example, if a taxpayer sells a piece of equipment that has a basis of $10,000 and that has been depreciated by $5,000, the gain on the sale will be $5,000. Of this amount, $5,000 will be taxed as ordinary income and $0 will be taxed as a capital gain.

There are a few exceptions to the general rule that gains from the sale of Section 1245 property are taxed as ordinary income. These exceptions include:

If a taxpayer qualifies for one of these exceptions, the gain on the sale of the property will be taxed as a capital gain.

Section 1245 can be a complex provision, and taxpayers should consult with a tax advisor to determine how it applies to their particular situation.