Tax Consequences of Property Sales and Exchanges
By SimplyCPA · 11 October 2026
On this page (8)
- Gain or loss: Amount realised (cash + fair value of property received + liabilities relieved − selling costs) minus adjusted basis.
- Character: Capital assets give capital gain or loss; business property held over a year is Section 1231; inventory and recapture give ordinary income.
- Section 1231: Net gains are long-term capital gains; net losses are ordinary — the best of both worlds, subject to a five-year lookback for prior net losses.
- Recapture: Section 1245 makes all depreciation on equipment ordinary income; real property depreciation is taxed at up to 25% for individuals (unrecaptured Section 1250 gain).
- Deferral and disallowance: Installment sales spread gain over collections (but recapture is taxed in year one); losses on sales to related parties are disallowed.
Step 1: compute realised gain or loss
Amount realised = cash received + fair market value of property received + liabilities assumed by the buyer − selling expenses.
Adjusted basis = original cost + capital improvements − depreciation (and other basis reductions).
Step 2: is the gain recognised?
Realised gains are recognised unless a nonrecognition provision applies — like-kind exchanges (Section 1031), involuntary conversions (Section 1033), contributions to partnerships (Section 721) or corporations (Section 351), or the home-sale exclusion (Section 121).
Step 3: determine the character
| Asset | Character |
|---|---|
| Investments, personal-use property | Capital (personal-use losses not deductible) |
| Depreciable property and land used in a business, held more than one year | Section 1231 |
| Inventory, receivables | Ordinary |
| Business property held one year or less | Ordinary |
Depreciation recapture
- Section 1245 (equipment, vehicles, most personal property): gain is ordinary to the extent of all depreciation taken; any excess is Section 1231.
- Section 1250 (buildings): for property depreciated straight-line, there's generally no ordinary recapture for individuals, but the gain attributable to depreciation is unrecaptured Section 1250 gain, taxed at up to 25%.
- Section 291: corporations treat 20% of the depreciation on real property as ordinary income.
Example: Equipment cost $100,000; depreciation taken $70,000; adjusted basis $30,000. Sold for $110,000.
Total gain = $80,000. Section 1245 recapture (ordinary) = $70,000. The remaining $10,000 is Section 1231 gain.
If it had sold for $50,000: gain $20,000, all ordinary recapture.
Netting Section 1231
- Net all Section 1231 gains and losses for the year (after recapture).
- A net loss is ordinary — fully deductible.
- A net gain is long-term capital gain, except to the extent of unrecaptured net Section 1231 losses from the previous five years, which make that portion ordinary (the five-year lookback).
Installment sales (Section 453)
When at least one payment is received after the year of sale, gain is generally recognised as payments are collected: gross profit percentage × payments received. Depreciation recapture, however, is recognised in full in the year of sale. Dealers and sales of inventory can't use the method.
Related parties (Section 267)
Losses on sales to related parties (family members, controlled entities) are disallowed. If the buyer later sells at a gain, it can reduce that gain by the disallowed loss.
See also like-kind exchanges and capital gains and losses.