SECTION 8. DEPRECIATION

RECAPTURE

.01 Defined terms . For purposes of this notice:

(1) QPP change in use . (a) In general . A QPP change in use occurs if, at any time within the 10-calendar-year period beginning on the date a taxpayer places QPP in service, the QPP (i) ceases to satisfy the integral part requirement, and (ii) is used by the taxpayer in another productive use that results in the property that was previously QPP constituting disqualified property (as defined in section 8.01(2) of this notice). Accordingly, a QPP change in use has not occurred when a taxpayer ceases to use QPP as an integral part of one QPA and begins to use it as an integral part of another QPA, provided the QPP was not used in another productive use not described in section 5.01 of this notice in the interim. If only a portion of QPP undergoes a QPP change in use, this section 8 applies only to the portion that underwent a change in use, provided that the other portion(s) of the QPP continue to meet the requirements of section 4.01 of this notice.

(b) Special rule for consolidated groups . For QPP subject to an intercompany lease described in section 4.02(3)(b) of this notice, if B ceases to have a QPA that is conducted in, or takes place within, the QPP, or if S or B leaves the consolidated group, then S has a QPP change in use.

(c) Leases to commonly controlled per- sons . For QPP subject to a lease agreement between a lessor pass-through entity and a commonly controlled person, or between a lessor individual and a commonly controlled person, if the commonly controlled person leasing the QPP ceases to have a QPA that is conducted in, or takes place within, the QPP, or if the commonly controlled person is no longer described in section 4.02(3)(c) of this notice for any taxable year, the lessor pass-through entity or lessor individual, as applicable, has a QPP change in use.

(d) Temporarily idle property . A property that has been placed in service but is temporarily idle does not cease to satisfy the integral part requirement and does not have a QPP change in use. For this purpose, property is temporarily idle when the taxpayer takes it out of service for a finite period with the expectation of resuming a QPA in the near future (for example, property taken out of service while upgrading a production line or performing facility-wide maintenance).

(2) Disqualified property . The term disqualified property refers to QPP that underwent a QPP change in use and is no longer QPP. Disqualified property includes only the portion of the QPP that underwent a QPP change in use.

(3) Year of change . The term year of change refers to the taxable year in which a QPP change in use occurs.

.02 Application of § 1245(a)(1) upon a QPP change in use . Disqualified property is subject to § 1245(a)(1) and is treated as having been disposed of by the taxpayer as of the first time the property had a QPP change in use. Upon such QPP change in use, the excess of the recomputed basis (as defined in § 1245(a)(2)) of the disqualified property over the adjusted basis (as defined in § 1011(a)) of the disqualified property is treated as ordinary income in the year of change. To determine the recomputed basis of disqualified property, see section 8.05 of this notice.

.03 Adjustment to basis of property for gain recognized upon a change in use . The taxpayer’s basis in disqualified property is increased by the amount of gain recognized under section 8.02 of this notice. Solely for purposes of determining the depreciation allowance for disqualified property after a QPP change in use, the adjustment to basis in this section 8.03 is treated as having occurred on the first day of the year of change.

.04 Determination of depreciation allowance for disqualified property . The depreciation allowance for disqualified property in the year of change and all subsequent taxable years is determined as though the disqualified property was placed in service by the taxpayer as a new separate asset on the first day of the year of change, taking into account the applicable convention.

March 9, 2026 694 Bulletin No. 2026–11

.05 Determination of recomputed basis of disqualified property .

(1) In general . For purposes of applying § 1245(a)(1), the recomputed basis of disqualified property shall be determined by multiplying the eligible property’s unadjusted depreciable basis designated as QPP by the percentage of the eligible property that underwent a change in use (as determined under section 8.05(2) of this notice). For example, assume that the entire eligible property had an unadjusted depreciable basis of $100, and the taxpayer elected to designate $80 of it as QPP. If 50% of the eligible property undergoes a change in use, the recomputed basis of the disqualified property under § 1245(a) (2) equals $40 (50% of $80).

(2) Determination of percentage of eli- gible property that underwent change in use . A taxpayer may determine the portion of the eligible property (expressed as a percentage) that underwent a change in use using any reasonable method that takes into account the data and criteria described in section 4.08 of this notice. A taxpayer must use the same method of determining the portion of eligible property that underwent a change in use consistently for any subsequent partial changes in use with respect to the same eligible property.

(3) Unit-of-property determination after a partial change in use . Solely for purposes of determining whether the remaining eligible property continues to be used as an integral part of a QPA and has not experienced a QPP change in use, the rules in section 4.03 of this notice are applied by disregarding the eligible property that underwent a change in use.

.06 Ineligibility for certain elections . Disqualified property is not eligible in the year of change for the election provided under § 179, the additional first year depreciation deduction provided in § 168(k), or the special depreciation allowances under §§ 168(l) and 168(m).

.07 Examples . The following examples illustrate the rules set forth in section 8 of this notice:

(1) Example 1 . (a) Facts . Company A, a calendar-year taxpayer, places a 50,000 square-foot factory (Factory A) consisting entirely of eligible property in service on January 1, 2027, and elects under section 7 of this notice to designate the entire $10,000,000 unadjusted depreciable basis of Factory A as QPP. Company A’s

special depreciation allowance under § 168(n) for the 2027 taxable year is $10,000,000, and Company A’s adjusted basis in the QPP is $0 as of January 1, 2028. From January 1, 2027, to December 19, 2032, Company A uses the QPP as an integral part of a QPA. However, during the remaining portion of the taxable year ending December 31, 2032 (the 2032 taxable year), Company A ceases using the property as an integral part of a QPA and begins using the property in another productive use that is not a QPA.

(b) Analysis . Under section 8.01(1)(a) of this notice, Company A’s QPP underwent a QPP change in use in the 2032 taxable year and became disqualified property when Company A ceased using the QPP as an integral part of a QPA and began using the property in another productive use. Under section 8.02 of this notice, Company A is treated as disposing of the QPP and recognizes a gain of $10,000,000 in the 2032 taxable year which is treated as ordinary income. Under section 8.03 of this notice, Company A’s adjusted basis of $0 in the disqualified property is increased by $10,000,000 as of January 1, 2032, for purposes of determining the depreciation allowance for the disqualified property starting in the 2032 taxable year.

Under section 8.04 of this notice, Company A determines its depreciation allowance for the disqualified property in the year of change and all subsequent taxable years by treating the disqualified property as a new separate asset placed in service on the first day of the year of change, taking into account the applicable convention. As the disqualified property is nonresidential real property, the depreciation allowance is determined using the straight line method under § 168(b)(3) and the midmonth convention under § 168(d)(2). Accordingly, for the 2032 taxable year, Company A has a depreciation allowance of $245,726, equal to the unadjusted basis of $10,000,000 divided by 39 years, times 11.5 divided by 12 months.

(2) Example 2 . (a) Facts . The facts are the same as in Example 1, except (i) Company A only designated $8,000,000 of Factory A’s unadjusted depreciable basis as QPP, and (ii) during the remaining portion of the 2032 taxable year, only 25,000 square feet of Factory A underwent a change in use. Assume Company A’s determination that only 25,000 square feet of Factory A underwent a change in use was made in accordance with section 8.05(2) of this notice, and that the remaining 25,000 square feet of Factory A continue to meet the requirements of section 4.01 of this notice without regard to the 25,000 square feet that underwent a change in use.

(b) Analysis . (i) Section 1245 gain . Under section 8.05(1) of this notice, for purposes of applying § 1245(a)(1), the recomputed basis of Factory A’s disqualified property equals $4,000,000 (the $8,000,000 of the eligible property’s unadjusted depreciable basis designated as QPP by Factory A, multiplied by 50 percent, which is the percentage of the eligible property that underwent a change in use, calculated based on Company A’s reasonable determination that 25,000 square feet of Factory A underwent a change in use). Under section 8.02 of this notice, Company A is treated as disposing of the portion of Factory A that is disqualified property and recognizes a gain of

$4,000,000 in the 2032 taxable year which is treated as ordinary income.

(ii) Basis of disqualified property . Under section 8.03 of this notice, the disqualified property in Factory A is treated as a new, separate asset, and Company A’s adjusted basis of $0 in the disqualified property is increased by $4,000,000 as of January 1, 2032, for purposes of determining the depreciation allowance for the disqualified property starting in the 2032 taxable year. (iii) Depreciation allowances for disqualified property . Under section 8.04 of this notice, Company A determines its depreciation allowance for the disqualified property in the year of change and all subsequent taxable years by treating the disqualified property as placed in service on the first day of the year of change, taking into account the applicable convention. As the disqualified property is nonresidential real property, the depreciation allowance is determined using the straight line method under § 168(b)(3) and the mid-month convention under § 168(d)(2). Accordingly, for the 2032 taxable year, Company A has a depreciation allowance of $98,291, equal to the unadjusted basis of $4,000,000 divided by 39 years, times 11.5 divided by 12 months.

(iv) Depreciation allowances for portion(s) of property not designated as QPP . Under section 8.01(1)(a) of this notice, the rules in section 8 of this notice do not apply to the portion(s) of Factory A not designated as QPP (undesignated property). Therefore, the undesignated property is not treated as undergoing a QPP change in use, even though Company A began using part or all of the undesignated property in another productive use. Instead, the undesignated property continues to be depreciated using the applicable depreciation method, recovery period, and convention.

.08 Change in use by a transferee fol- lowing a fully or partially tax-free trans- fer of QPP . For purposes of applying this section 8 to a change in use by a transferee following a fully or partially tax-free transfer of QPP, a taxpayer applies rules consistent with §§ 1.1245-2(a)(4) and (c) (2), and 1.1245-4(c).