A gain on the disposition of §1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. The gain treated as ordinary income is the lesser of:
- The depreciation 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 taking into account depreciation.)
This is all taxed at the Capital Gains Rate. Any gain recognized that is more than the part that is ordinary income from depreciation is §1231 gain.