Section 1231 and Section 1245 of the Internal Revenue Code distinguish between different types of depreciable property used in a trade or business, or held for the production of income. Section 1231 assets typically include land, buildings, and equipment held for more than one year. Section 1245 assets generally encompass personal property, such as machinery, vehicles, and certain other equipment, also subject to depreciation. For example, a manufacturing facility would be categorized under Section 1231, while the machinery within that facility would fall under Section 1245.
The distinction between these two categories is crucial for determining how gains and losses are treated for tax purposes. Gains on Section 1231 assets are often taxed at the lower capital gains rates, providing a potential tax advantage. However, gains on Section 1245 assets are recaptured as ordinary income up to the amount of depreciation taken, potentially negating some of the tax benefits associated with depreciation deductions. This classification system has been a significant aspect of tax law for many years, influencing investment decisions and business operations.
