§ 1245 and § 1250 Are Not the Same Number — Here Is Why That Matters

Depreciation Recapture Strategy — September Preview

By Steve Medendorp, Esq. · Tax Alpha Companies · August 2026

Most clients — and many of their advisors — treat depreciation recapture as a single line item on the tax calculation. In a condemnation involving commercial or income-producing property, that assumption leads to planning errors that are expensive to fix after the fact. Recapture is not one number. It is two separate calculations, under two different Code sections, taxed at two different rates, and triggered at two different points in the transaction.

Getting this distinction right before the award is received determines how the client plans for their cash obligations in the year of the taking — and whether the § 1033 reinvestment election can be structured to maximum advantage.

§ 1245 Recapture — The Non-Deferrable Piece

Section 1245 applies to personal property and equipment: machinery, fencing, irrigation systems, storage structures, vehicles, and other depreciable assets that are not buildings or structural components of buildings. When these assets are condemned — or when the award includes proceeds allocable to them — the depreciation previously taken is recaptured as ordinary income in the year of receipt.

The critical point: § 1245 recapture is not deferred by a § 1033 election. Even if the client makes a timely § 1033 election and acquires qualifying replacement property, the § 1245 recapture amount is still recognized as ordinary income in the year the condemnation proceeds arrive. The deferral only applies to the portion of the gain that is not subject to § 1245 recapture.

For clients whose condemned property includes significant personal property or equipment — common in agricultural takings, pipeline corridor cases, and industrial condemnations — this is a cash flow planning issue that needs to be addressed before the check clears. The client will owe ordinary income tax on the recapture amount regardless of what they do with the proceeds.

§ 1250 Recapture — The Real Property Piece

Section 1250 applies to depreciated real property — buildings and their structural components. For commercial property that has been held and depreciated for a significant period, the accumulated depreciation on improvements creates unrecaptured § 1250 gain, which is taxed at a maximum federal rate of 25% — separate from and in addition to any capital gain on appreciation above original cost.

Unlike § 1245 recapture, the § 1250 piece may be deferred under § 1033 if the client makes a timely election and acquires qualifying replacement property within the replacement period. The gain is not eliminated — it carries into the replacement property's basis — but the recognition is postponed until the replacement property is eventually sold or disposed of.

Why the Distinction Matters for Planning

The separation between § 1245 and § 1250 recapture matters for two key reasons:

Cash Flow in the Year of the Taking

If the client understands that § 1245 recapture will be owed as ordinary income in the year of receipt — regardless of reinvestment — they can plan for that cash obligation. If they assume their § 1033 election covers everything, they face an unexpected tax bill at filing. This is one of the most common planning failures we see in condemnation cases, and it is entirely avoidable.

Structuring the Reinvestment Election

Knowing the split between § 1245 and § 1250 recapture allows the tax team to structure the § 1033 election to maximize the benefit of deferral on the portion that can actually be deferred. It also determines how much cash the client needs to retain for tax obligations versus how much can be reinvested in replacement property.

Quick Reference — § 1245 vs. § 1250

§ 1245: Personal property and equipment → taxed as ordinary income → recognized in year of receipt regardless of § 1033 election. Cannot be deferred.

§ 1250: Depreciated buildings and structural components → unrecaptured § 1250 gain → maximum 25% federal rate → may be deferred if § 1033 election is properly made and replacement property is acquired within the replacement period.

Run the recapture calculation before the award closes so your client knows what they owe regardless of reinvestment — and what can still be managed with the right planning.

What This Means Before the Award Arrives

The recapture analysis is not a tax return exercise — it is a pre-closing planning tool. Before the condemnation proceeds are received, the tax team should calculate the approximate § 1245 recapture exposure (the cash obligation that cannot be deferred) and the § 1250 exposure (the amount that may be deferred with a properly structured § 1033 election).

Clients who understand this before closing make better reinvestment decisions and avoid the unpleasant surprise of a tax bill they did not anticipate. Clients who learn about it at tax time have fewer options and less flexibility.

Coming in September

Next month's issue will build out a full § 1245 and § 1250 recapture planning framework — including how to sequence the reinvestment election around the non-deferrable recapture liability, how to handle mixed-property condemnations where some assets are § 1245 and some are § 1250, and the specific calculation methodology the IRS expects to see.

Not sure how to calculate your client's recapture exposure before the award arrives?

Steve Medendorp can walk through the § 1245 and § 1250 split for a specific client situation and help structure the § 1033 election before the proceeds arrive. The earlier we get into the analysis, the more options your client has.

Schedule a Call with Steve → https://taxalphaeminentdomain.com/#book

THIS IS NOT LEGAL ADVICE

This communication is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.

Matt Chancey, Ross Brannon, Johnny Borrelli, Jimmy Nelson and Jacob Harvey are Registered Representatives of Crescent Securities Group, Inc. ("CSG"), Member FINRA/SIPC and an Investment Advisory Representative of Crescent Advisor Group, Inc. ("CAG"), an SEC Registered Investment Advisor. Neither CSG or CAG are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Brokerage services offered through CSG. Investment advisory services offered through CAG. Steve Medendorp is a Florida licensed attorney but does not provide any legal or tax advice. Steve Medendorp and CSG or CAG are not affiliated.

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