Gain Treated as Ordinary Income: Business Property Sales (2025 IRS Guide)

This guide covers “Gain Treated as Ordinary Income” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. See Gain Treated as Ordinary Income, later.

Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier.

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.

1. The depreciation and amortization allowed or allowable on the property.

2. The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property).

A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later.

For any other disposition of section 1245 property, ordinary income is the lesser of (1), earlier, or the amount by which its FMV is more than its adjusted basis. See Gifts and Transfers at Death, later.

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

Depreciation taken on other property or taken 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 a like-kind exchange or involuntary conversion.

• 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 that must be recaptured as ordinary income include (but are not limited to) the following items.

1. Ordinary depreciation deductions.

2. Any special depreciation allowance you claimed.

3. Amortization deductions for any of the following costs.

   1. Acquiring a lease.

   2. Lessee improvements.

   3. Certified pollution control facilities.

   4. Certain reforestation expenses.

   5. Section 197 intangibles.

4. The section 179 deduction.

5. Deductions for all of the following costs.

   1. Removing barriers to the disabled and the elderly.

   2. Tertiary injectant expenses.

   3. Qualified depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction).

   4. Environmental cleanup costs.

   5. Certain reforestation expenses.

   6. Qualified disaster expenses.

6. Any basis reduction for the investment credit (minus any basis increase for credit recapture).

7. Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture).

Example.

You file your returns on a calendar-year basis. In February 2023, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. You used the half-year convention, and your MACRS deductions for the truck were $2,000 in 2023 and $3,200 in 2024. You did not take the section 179 deduction. You sold the truck in May 2025 for $7,000. The MACRS deduction in 2025, the year of sale, is $960 (½ of $1,920). Figure the gain treated as ordinary income as follows.

Depreciation on other tangible property.

You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 Property.

For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation.

Depreciation allowed or allowable.

The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. However, 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 deduction at all 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 gain is treated as ordinary income under the rules for section 1245 depreciation recapture.

Multiple asset accounts.

In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately.

Example.

In one transaction, you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. All of the depreciation was recorded in a single depreciation account. After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item.

However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation.

Normal retirement.

The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 544 (2025), Sales and Other Dispositions of Assets: Ordinary or Capital Gain or Loss for Business Property — Depreciation Recapture — Section 1245 Property — Gain Treated as Ordinary Income — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.