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Selling your business property? Here’s what you need to know about taxes

If you’re selling property used in your trade or business, you should understand the tax implications. There are many complex rules that can potentially apply. To simplify this discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year.

Note: There are different rules for property held primarily for sale to customers in the ordinary course of business, intellectual property, low-income housing, property that involves farming or livestock, and other types of property.

Basic Rules

1. Net Gain: If you sell your property and make a profit, this profit is typically treated as a long-term capital gain if you’ve owned the property for more than a year. Long-term capital gains are usually taxed at a lower rate than ordinary income. However, there are “recapture” rules that might change some of this gain back to ordinary income.
2. Net Loss: If you sell your property and incur a loss, you can fully deduct this loss against your ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

Recapture Rules

• Recapture: If you’ve previously taken depreciation deductions on the property, some of your gain may be taxed as ordinary income rather than as a long-term capital gain. This means you might pay a higher tax rate on part of your profit.
• Five-Year Rule: If you’ve had a net loss from selling business property within the past five years, any gain from selling business property now is treated as ordinary income.

Types of Property and Their Rules

Under the Internal Revenue Code, different provisions address different types of property. For example:

1. Section 1245 Property:
   • What It Includes: All depreciable personal property (like machinery or equipment) and certain depreciable real property (like special-use buildings).
   • Tax Rule: When you sell it, any gain up to the amount of your previous depreciation deductions is taxed as ordinary income.
2. Section 1250 Property:
   • What It Includes: Buildings and their structural components.
   • Tax Rule for Property Placed in Service After 1986: Gain related to depreciation deductions is taxed at a higher rate (up to 28.8%) than the typical long-term capital gain rate (up to 23.8%), but still lower than ordinary income rates.
   • Older Section 1250 Property:
     • Placed in Service Before 1987 but After 1980: Special rules may apply.
     • Placed in Service Before 1981: Different special rules may apply.

Summary

Selling business property involves various tax rules, and even simplified, it can be complex. If you have any questions or need help understanding the tax implications of your specific situation, please contact us. We’re always ready to help!