Section 1250 property is any real property, other than section 1245 property as defined in section 1245(a)(3), which is or has been property of a character subject to the allowance for depreciation provided in section 167 (26 U.S.C. 1250(c)). The IRS states the same class in plainer words: all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property, including a leasehold of land or of section 1250 property, but not a fee simple interest in land, which is not depreciable (IRS, Publication 544 (2025)).
The class and the tax result are different questions. Section 1250 recapture is a separate rule that reaches only part of the depreciation, and unrecaptured section 1250 gain is neither recapture nor ordinary income but a capital gains rate ceiling, both of which are worked through in depreciation recapture.
The Three Types of Real Property in the Class
The regulation is more specific than the statute. It states that the term section 1250 property includes three types of depreciable real property, and it names each one (26 CFR 1.1250-1(e)(3)).
The first type is intangible real property. A leasehold of land, or of section 1250 property, is intangible real property, so the leasehold itself sits in the class, while a fee simple interest in the land underneath does not, because it is not depreciable (26 CFR 1.1250-1(e)(3)).
The second type is a building or its structural components, and both terms take the meanings they carry for section 1245 purposes rather than their everyday ones (26 CFR 1.1250-1(e)(3)). Those two definitions, down to walls, floors, plumbing fixtures and wiring, are set out in 1245 property.
The third type is all other tangible real property, with two carve-outs. Property described in section 1245(a)(3)(B), which the regulation glosses as property used as an integral part of a specified activity or as a specified facility, is out, and so is property described in section 1245(a)(3)(D), which the statute defines as a single purpose agricultural or horticultural structure (26 CFR 1.1250-1(e)(3) and 26 U.S.C. 1245(a)(3)).
The regulation works the split on stated numbers. A lessor owns land with a fully equipped factory building on it and leases the whole thing to a tenant for a single lump sum payment of $100,000. If 30 percent of the fair market value is properly allocable to the land, 25 percent to the building and its structural components, and 45 percent to the equipment, then 55 percent of the tenant’s leasehold is section 1250 property, because the leasehold of the land and the leasehold of the building both sit in the class, while the equipment share follows section 1245 (26 CFR 1.1250-1(e)(3)).
Once It Becomes Section 1245 Property It Cannot Go Back
Property may lose its character as section 1250 property and become section 1245 property, for example when third-type property is converted to use as an integral part of manufacturing. The move runs one way only: once property in the hands of a taxpayer is section 1245 property, it can never become section 1250 property in the hands of that taxpayer (26 CFR 1.1250-1(e)(4)).
The IRS states the rule from the taxpayer’s side. If section 1250 property becomes section 1245 property because its use changed, it can never again be treated as section 1250 property (IRS, Publication 544 (2025)). So an asset that has once crossed into section 1245 property stays there even if the use later changes back, and the class code on the schedule has to hold that.
Where the Line Runs Against Section 1245 Property
The two classes meet inside one building rather than between buildings. The section 1245 class that reaches other tangible property excludes a building or its structural components by its own terms (26 U.S.C. 1245(a)(3)(B)), so a cost segregation study works inside a building’s cost, separating the components that qualify on their own from the building itself. What that trade costs at the exit is worked through in commercial real estate accounting, and the full class list on the other side of the line is in 1245 property.
The Recovery Periods That Attach to the Class
The class reaches the depreciation schedule long before it reaches a disposition, and one property type under the Modified Accelerated Cost Recovery System, MACRS, is defined by reference to it. Nonresidential real property means section 1250 property that is neither residential rental property nor property with a class life of less than 27.5 years, and residential rental property means any building or structure if 80 percent or more of the gross rental income from it for the taxable year is rental income from dwelling units (26 U.S.C. 168(e)(2)). That 80 percent test turns on the rental income mix rather than on floor area, so a mixed-use building is classified by where its rents come from.
The applicable recovery period is 27.5 years for residential rental property and 39 years for nonresidential real property (26 U.S.C. 168(c)).
Where the Disposition Lands
The class code carried on the fixed asset schedule is the same one read at the exit.
Form 4797 then routes the disposition by class. Depreciable real trade or business property held more than 1 year and sold at a gain goes to Part III, in the section 1250 block, while the same property sold at a loss goes to Part I (IRS, Instructions for Form 4797 (2025)).
Land does not travel with the building. Where a building and the land under it are disposed of in the same transaction and the seller realizes a gain, the amount realized is allocated between them by fair market value, and for property held more than 1 year the building is reported in Part III and the land in Part I (IRS, Instructions for Form 4797 (2025)).
The section 1250 block is line 26, and the split inside the class shows on the face of the form. Line 26c tells the preparer to skip lines 26d and 26e if the property is residential rental property or if line 24 is not more than line 26a (IRS, Form 4797 (2025)). The computation behind those lines is set out in depreciation recapture, and the netting that decides the character of whatever gain is left is in section 1231.
An older schedule can route the other way. Real property depreciable under ACRS, the pre-1987 rules, is subject to recapture under section 1245 rather than section 1250. The exceptions still treated as section 1250 property are real property recovered over 15, 18 or 19 years and low income housing where that property is residential rental property, where it is used mostly outside the United States, or where a straight line election was made, together with low income rental housing described in section 1250(a)(1)(B) (IRS, Instructions for Form 4797 (2025)).
A disposition inside a like-kind exchange is capped rather than removed. Where gain is not recognized in whole or in part under section 1031 or 1033, the gain taken into account under section 1250 is held to a recognition limit of its own (26 U.S.C. 1250(d)(4)). The exchange mechanics that sit around that limit are in 1031 exchange.
Common Questions
A building and its structural components, and a depreciable leasehold of land or of section 1250 property, are the ordinary examples (26 CFR 1.1250-1(e)(3)). A fee simple interest in land is not one, because land is not depreciable (IRS, Publication 544 (2025)).
The rental building and its structural components are section 1250 property, while the appliances and equipment inside it are personal property and therefore section 1245 property (26 U.S.C. 1245(a)(3)). The full class list is in 1245 property, and the different tax outcomes at sale are in depreciation recapture.
The IRS states the class in two places. The Instructions for Form 4797 define section 1250 property as depreciable real property other than section 1245 property (IRS, Instructions for Form 4797 (2025)), and Publication 544 adds that the class takes in a depreciable leasehold and leaves out a fee simple interest in land (IRS, Publication 544 (2025)).
They answer different questions, so they are not alternatives. Section 1250 names a property class, while section 1231 characterizes whatever gain is left after any recapture. The netting, and the same comparison run against section 1245 property, are set out in section 1231.
If fixed asset coding and disposition workpapers are the work that slips when a firm runs short on capacity, a trial task puts a block of that work through Accountably’s review chain before any live file depends on it.
