IRS Publication 544 — Sales and Other Dispositions of Assets

If you dispose of section 1245 or 1250 property in a like-kind exchange that is subject to ordinary income recapture (see Depreciation Recapture, earlier), a portion of your gain may be reportable as ordinary income. Section 1245 property. If property is disposed of and the gain computed on the like-kind exchange is not recognized in whole or in part, the amount of gain recaptured as ordinary income under section 1245(b)(4) is the lesser of:

• The ordinary income recapture computed on the section 1245(a)(1) property, or

• The sum of the gain recognized on the like-kind exchange, plus the FMV of property acquired that is not section 1245 property.

Example. You exchange real property with an FMV of $100,000 and basis of $50,000 for real property with an FMV of $60,000 and $40,000 cash. The gain realized on the exchange is $50,000. The gain recognized on the like-kind exchange is $40,000 (the cash received). The property you dispose of consists of section 1245 and section 1250 property. The section 1245 property has a basis of $10,000 and an adjusted basis of $0. The property received consists of $45,000 of section 1250 property and $15,000 of section 1245 property. The section 1245 ordinary income recapture is computed as follows. Lesser of recomputed basis or amount realized on section 1245 property … $10,000 Adjusted basis of section 1245 property … 0 Ordinary income recapture under section 1245(a)(1) .. 10,000 Gain recognized on like-kind exchange … 40,000 Plus: FMV of section 1250 property received … 45,000 Section 1245(b)(4) limit … $85,000 The lesser of the two amounts ($10,000) recaptured as ordinary income.

In some instances, the amount recaptured for section 1245 is greater than the gain otherwise recognized on the exchange. See the following example.

Example. Assume the same facts as in the above example, except the property you receive consists of real property with an FMV of $100,000 and no cash is received. Your gain realized on the exchange is $50,000, but no gain is recognized on the exchange. Your ordinary income recapture is still $10,000, the lesser of the recapture amount of $10,000 and the section 1245(b)(4) limit of $45,000 ($0 gain recognized plus $45,000 FMV of section 1250 property received). You must recognize the $10,000 recapture as ordinary income. The remaining $40,000 gain is deferred. Similar rules apply for section 1252, 1254, and 1255 property. See Regulations sections 1.1252-2(d) and 1. 1254-2(d), and Temporary Regulations section 16A.1255-2(c) for details on these types of property. Section 1250 property. If the property disposed of contains section 1250 property that is subject to ordinary income deprecation recapture, the amount of gain taken into account in the like -kind exchange is limited to the greater of: