Depreciation Recapture — 2025 Publ 225 (PDF)

If you dispose of depreciable property (section 1245 or section 1250 property) or amortizable

60 Chapter 9 Dispositions of Property Used in Farming Publication 225 (2025)

property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Any remaining gain is section 1231 gain (discussed earlier).

To figure any gain that must be reported as ordinary income, you must keep

allowed or allowable on your property. For more information on depreciation recapture, see chapter 3 of Pub. 544. Also see Pub. 946.

not limited to) the following items. See Depreci- ation Recapture in chapter 3 of Pub. 544 for more details.

Ordinary depreciation deductions.
The section 179 expense deduction (see

chapter 7).

Any special depreciation allowance.
Amortization deductions for any of the following costs.

a. Acquiring a lease.

b. Lessee improvements.

c. Pollution control facilities.

d. Reforestation expenses.

e. Section 197 intangibles.

f. Qualified disaster expenses.

g. Franchises, trademarks, and trade

names acquired before August 11, 1993.

Example. You file your returns on a calendar year basis. In February 2023, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $30,000. You used the half-year convention and your MACRS deductions for the truck were $6,000 in 2023 and $9,600 in 2024. You did not claim the section 179 expense deduction for the truck. You sold it in May 2025 for $21,000. The MACRS deduction in 2025, the year of sale, is $2,880 ( ¹ /2 of $5,760). Figure the gain treated as ordinary income as follows.

Amount realized . . . . . . . . . . . . . . . . . . $21,000
Cost (February 2023) . . . . . . . $30,000
Depreciation allowed or allowable (MACRS deductions: $6,000 + $9,600 + $2,880) . . . 18,480
Adjusted basis (subtract line 3 from line 2) . . . . . . . . . . . . . . . . . . . . . $11,520
Gain realized (subtract line 4 from line 1) . . . . . . . . . . . . . . . . . . . . . $9,480 6. Gain treated as ordinary income (lesser of line 3 or line 5) . . . . . . . . $9,480

Depreciation allowed or allowable. You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. If you did not take any deductions in prior years for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. For more information on depreciation allowed or allowable, see chap- ter 7. For information on adjustments to basis for depreciation allowed or allowable, see chap- ter 6.

Disposition of plants. If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant that would have been subject to the uniform capitalization rules as section 1245 property. If you have a gain on the

Section 1245 Property

A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Any recognized gain that is more than the part that is ordinary income is a section 1231 gain.

Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property.

Personal property (either tangible or intangible).
Other tangible property (except buildings and their structural components) used as any of the following. See Buildings and structural components , later.

a. An integral part of manufacturing, pro duction, or extraction, or of furnishing certain services.

b. A research facility in any of the activi ties in (a).

c. A facility in any of the activities in (a)

above, for the bulk storage of fungible commodities (discussed later).

Where applicable, that part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following.

a. Amortization of certified pollution con trol facilities.

b. The section 179 expense deduction.

c. Deduction for clean-fuel vehicles and

certain refueling property.

d. Expenditures to remove architectural

and transportation barriers to the handicapped and elderly.

e. Certain reforestation expenditures (as

described under Reforestation Costs in chapter 7).

Single-purpose agricultural (livestock) or horticultural structures.
Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum.

Buildings and structural components. Section 1245 property does not include buildings and structural components. The term “building” includes a house, barn, warehouse, or garage. The term “structural component” includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc.

Do not treat a structure that is essentially machinery or equipment as a building or structural component. Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure’s use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced.

The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property.

Facility for bulk storage of fungible com- modities. This is a facility used mainly for the bulk storage of fungible commodities. Bulk storage means storage of a commodity in a large mass before it is used. For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. To be fungible, a commodity must be such that each of its parts is essentially interchangeable, and each of its parts is indistinguishable from another part.

Gain Treated as Ordinary Income

The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts.

The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property.
The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property).

See chapter 3 of Pub. 544 for more information on dispositions of section 1245 property.

Use Part III of Form 4797 to figure the ordinary income part of the gain.

Depreciation claimed on other property or claimed by other taxpayers. Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts.

Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in an applicable like-kind exchange or involuntary conversion. For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chap-

ter 8.

Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person’s adjusted basis (for example, the donor’s depreciation deductions on property you received as a gift).

Depreciation and amortization. Depreciation and amortization deductions that must be recaptured as ordinary income include (but are

Publication 225 (2025) Chapter 9 Dispositions of Property Used in Farming 61

Amount to report as ordinary income. You report as ordinary income the lesser of the following amounts.

Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the fair market value for all other dispositions).
The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next.

Applicable percentage. The applicable percentage is based on the length of time you held the land. If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. If you dispose of the land within the sixth through ninth years after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the fifth year. If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain.

Example. You acquired farmland on January 19, 2017. You incurred $15,000 of soil and water conservation expenditures for the land that were fully deductible. On October 5, 2025, you sold the land at a $30,000 gain. The applicable percentage is 40% because you sold the land within the eighth year after you acquired it. You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain.

Section 1255 property. If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision.

Amount to report as ordinary income. You report as ordinary income the lesser of the following amounts.

The applicable percentage of the total excluded cost-sharing payments.
The gain on the disposition of the property.

You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section.

Applicable percentage. The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. If the property is held less than 10 years after you receive the payments, the percentage is 100%. After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%.

Form 4797, Part III. Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property.

property’s disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. For plant sales that are reported on Schedule F (Form 1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. You can use the farm-price method discussed in chapter 2 to figure these expenses.

Example. You sold your apple orchard in 2025 for $80,000. Your adjusted basis at the time of sale was $60,000. You bought the orchard in 2018, but the trees did not produce a crop until 2021. Your pre-productive expenses were $6,000. You elected not to use the uniform capitalization rules. You must treat $6,000 of the gain as ordinary income in addition to recapturing depreciation allowed or allowable on the orchard. This amount would be reported on Form 4797, Part III, as ordinary income.

See Uniform Capitalization Rules in