Section 1245 property is depreciable personal property and certain other tangible property used in activities such as manufacturing, but not a building or its structural components, with a separate rule for qualified production property (IRC §1245(a)(3)); a cost segregation study identifies the building components that are §1245 property, typically the 5- and 7-year components, and on a taxable sale at a gain the depreciation taken on them is recaptured as ordinary income.
That definition decides two things for an owner who orders a cost segregation study: how fast a component is depreciated, and how its depreciation is taxed when the property is sold. This guide covers the definition in the statute and regulations, the building components a cost segregation study usually identifies as §1245 property, and the recapture consequence at sale. The exit-planning side, including the net-present-value question, is in the 1245 recapture exit strategy guide.
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What Is Section 1245 Property Under the Tax Code?
IRC §1245(a)(3) defines section 1245 property as property that is or has been of a character subject to depreciation under §167 and that falls into one of these groups:
- Personal property (§1245(a)(3)(A)), which includes tangible personal property and intangible personal property (Treas. Reg. §1.1245-3(b)).
- Other tangible property (§1245(a)(3)(B)), which is not a building or its structural components and qualifies only if depreciation or amortization adjustments reflect its use as an integral part of manufacturing, production or extraction, or of furnishing transportation, communications, electric energy, gas, water or sewage disposal services, or its use as a research facility or a facility for the bulk storage of fungible commodities connected with those activities.
- Certain real property carrying amortization adjustments under listed sections such as §179 (§1245(a)(3)(C)), a single-purpose agricultural or horticultural structure (D), a storage facility used in petroleum distribution (E), and railroad grading or tunnel bore (F).
- Qualified production property as defined in §168(n)(2) (§1245(a)(3)(G)), added by Pub. L. 119-21 for property placed in service after July 4, 2025. The qualified production property 100% deduction guide explains that category.
For an ordinary rental or commercial building, the practical test is the first group. Treas. Reg. §1.48-1(c) defines tangible personal property as any tangible property except land and improvements to it, which includes property that is contained in or attached to a building but is not a structural component, and Treas. Reg. §1.48-1(e) assigns the building and its structural components, such as walls, floors, ceilings, plumbing and wiring that serve the building, to the other side of the line. Property that is contained in or attached to a building but is not a structural component can therefore be personal property, and the question for each component is whether it is part of the building or a separate asset, which is a facts-and-circumstances question that the IRS Cost Segregation Audit Techniques Guide (Publication 5653) applies using the permanence factors from Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975).
Which Building Components Does a Cost Segregation Study Identify as Section 1245 Property?
A cost segregation study identifies as section 1245 property the components of a building that are personal property rather than structural components, which are generally the 5-year and 7-year components, and it leaves the building structure and 15-year land improvements in §1250 property. The IRS Cost Segregation Audit Techniques Guide gives examples for a residential rental, and the guide is guidance for IRS staff, not law:
- Readily removable floor coverings. In the Residential Rental Property matrix of Publication 5653, carpeting, sheet vinyl and vinyl composition tile are section 1245 property in asset class 57.0 of Rev. Proc. 87-56 with a 5-year recovery period, while permanently attached coverings such as ceramic tile, marble and wood flooring fixed in place are §1250 property in the 27.5-year building. The flooring recovery period guide walks through that matrix row by row.
- Equipment and appliances. Items that are separate assets rather than part of the structure, such as residential appliances, are generally 5-year §1245 property in a residential rental.
- Electrical and plumbing that serve equipment. Wiring and piping that serve a specific piece of equipment, rather than the building generally, can be personal property, while the systems that serve the building are structural components, so this split depends on what each run of wiring or piping serves.
- Office furniture, fixtures and equipment. In a commercial property these are generally 7-year property in asset class 00.11 of Rev. Proc. 87-56, and they are §1245 property.
Two points keep the label straight. First, 15-year land improvements, such as paving, fencing, landscaping and site lighting, are real property: they are §1250 property under IRC §1250(c), not §1245 property, even though they are shorter-lived than the building. Second, the 27.5- or 39-year structure is §1250 property. A recovery period does not by itself decide the section, so "5-year" and "§1245" overlap heavily in a cost segregation study but are not the same test. A cost segregation study does not make a component §1245 property; the component's nature does, and the study documents the allocation.
How Does Section 1245 Classification Change Depreciation and Recapture?
Classifying a component as §1245 property shortens its depreciation and makes the depreciation taken on it ordinary-income recapture on a taxable sale at a gain. On the depreciation side, 5- and 7-year property is depreciated far faster than a 27.5- or 39-year structure and is eligible for bonus depreciation under IRC §168(k), which is 100% for qualified property acquired after January 19, 2025. Cost segregation does not create new basis; it changes when the same cost is deducted.
On the recapture side, the same classification decides the tax character of the gain at sale. A cost segregation study that moves cost into 5- and 7-year property front-loads deductions, and the §1245 layer is what the sale later takes back as ordinary income, which is why the front-loaded deduction is a timing benefit unless a rule such as the Opportunity Zone 10-year election applies. The 25% layer on the structure is a different provision, covered in the guide to unrecaptured section 1250 gain.
How Is Gain on Section 1245 Property Taxed When You Sell?
On a sale of section 1245 property at a gain, IRC §1245(a)(1) treats as ordinary income the lower of two amounts, in excess of adjusted basis: the property's recomputed basis (adjusted basis plus all depreciation and amortization allowed or allowable, under §1245(a)(2)(A)) or the amount realized. In plain terms, the gain is ordinary income up to the depreciation previously allowed or allowable, and any gain above that is not recapture. The rule applies however long the property was held, and "allowable" matters: depreciation that was allowable but never claimed is treated as taken.
Hypothetical, not a forecast. A cost segregation study assigns $100,000 of a building's cost to 5-year §1245 property, and the property is fully depreciated, leaving an adjusted basis of $0.
- If the sale allocates $60,000 to that property, the recomputed basis is $100,000 and the amount realized is $60,000, so $60,000 of gain is ordinary income.
- If the sale allocates $130,000 to it, the lower amount is the $100,000 recomputed basis, so $100,000 is ordinary income and the other $30,000 is §1231 gain, which is taxed as long-term capital gain when the property was held more than one year and net §1231 gain results.
Deferral and exclusion rules, such as the like-kind exchange limit in §1245(b)(4), are covered in the 1245 recapture exit strategy guide. After a 10-year hold in a Qualified Opportunity Fund with the §1400Z-2(c) election, the sale of the fund interest is treated differently, as the 10-year exclusion guide and the Opportunity Zone cost segregation guide explain.
How Does Section 1245 Property Differ From Section 1250 Property?
Section 1245 property is personal property (and the other categories in §1245(a)(3)), while section 1250 property is real property that is not §1245 property (IRC §1250(c)), such as the building structure and land improvements. The two are recaptured differently: §1245 depreciation is ordinary income up to the gain, whereas for real property held more than one year only depreciation above straight-line is ordinary income under §1250(a), and the straight-line depreciation is unrecaptured section 1250 gain, taxed at a maximum of 25% for a noncorporate taxpayer. A building with a cost segregation study usually carries both.
To see how a study would classify your own building, the cost segregation qualifier is the first step, and how cost segregation firms compare covers how providers document the component allocation. For the full picture of the layers at sale, read the three layers of gain when you sell.
Frequently Asked Questions
Is a building section 1245 property in a cost segregation study?
A building is generally not section 1245 property, because IRC §1245(a)(3)(B) and (E) exclude a building and its structural components; a building is §1250 property. The exceptions include a single-purpose agricultural or horticultural structure under §1245(a)(3)(D) and qualified production property under §1245(a)(3)(G), for property placed in service after July 4, 2025.
Are 15-year land improvements section 1245 property in a cost segregation study?
For an ordinary rental or commercial building, 15-year land improvements are not §1245 property: they are real property, so they are §1250 property under IRC §1250(c). Depreciation on them above straight-line, bonus depreciation included, is recaptured as ordinary income under §1250(a) when held more than one year, and the straight-line part is unrecaptured §1250 gain.
Is carpet section 1245 property under cost segregation?
Carpet is generally section 1245 property when it is readily removable, and the Residential Rental Property matrix in the IRS Cost Segregation Audit Techniques Guide places carpeting in asset class 57.0 with a 5-year recovery period. The guide is guidance for IRS staff, not law, and floor coverings that are permanently attached, such as ceramic tile, are §1250 property.
What tax rate applies to section 1245 recapture?
Section 1245 recapture is taxed at ordinary income rates, not the 25% maximum that applies to unrecaptured §1250 gain. For an individual, the top ordinary federal rate is 37%, and the recapture is limited to the lower of the depreciation allowed or allowable and the gain on the property.
Does section 1245 recapture apply to depreciation I never claimed?
Section 1245 recapture applies to depreciation that was allowable even if it was never claimed, because the recomputed basis in IRC §1245(a)(2)(A) adds back deductions "allowed or allowable." This is one reason a missed-depreciation catch-up through Form 3115 matters for a property you plan to sell.
Does a cost segregation study create section 1245 property?
A cost segregation study does not create section 1245 property; it identifies which components of a building already are personal property and separates their cost from the structure. The study changes the documented classification and the depreciation schedule, not the nature of the component or the total cost recovered.
