On the sale of depreciated personal property, the gain is ordinary income up to the depreciation taken (section 1245) and section 1231 gain above that; on real property, only depreciation in excess of straight line is recaptured (section 1250), with section 291 for corporations and the 25% rate for individuals. Form 4797, Part III, does the computation.
Recapture turns part of a gain from capital to ordinary.
When a depreciated asset is sold for more than its adjusted basis, the gain is not simply a capital gain. Section 1245 applies to depreciable personal property (and certain other property): the gain is ordinary income to the extent of the depreciation taken, including section 179 and bonus depreciation, and only the excess is section 1231 gain, which is netted with other section 1231 transactions and, if a net gain, taxed as long-term capital gain. Section 1250 applies to depreciable real property: only depreciation in excess of straight line is recaptured as ordinary income, which for buildings placed in service after 1986 under MACRS (straight line by law) is usually nothing. Corporations then add section 291, which treats 20% of the straight-line depreciation on section 1250 property as ordinary income, and individuals pay a maximum 25% rate on the unrecaptured section 1250 gain. Everything is reported on Form 4797, Part III for the recapture computation.
| Line | Amount |
|---|---|
| Cost of the machine (section 1245 property), placed in service 2019 | 91,250.00 |
| Accumulated depreciation to the date of sale, federal | 88,430.10 |
| Adjusted basis | 2,819.90 |
| Proceeds | 31,400.00 |
| Gain on disposal | 28,580.10 |
| Ordinary income under section 1245 (the lesser of the gain and the depreciation taken) | 28,580.10 |
| Section 1231 gain | 0.00 |
| Book entry | Debit | Credit |
|---|---|---|
| Cash | 31,400.00 | |
| Accumulated depreciation | 88,430.10 | |
| Machinery and equipment (cost) | 91,250.00 | |
| Gain on disposal of fixed assets | 28,580.10 |
A partial disposal recaptures in proportion.
When part of an asset is sold, the cost and accumulated depreciation of that part are removed, in the proportion the register records, and the gain on that part is computed the same way. The rest stays in service with its remaining basis. The partial dispositions article covers the election that lets a building owner write off a replaced component; for personal property, a partial disposal is a percentage on the disposal record.
Four things decide the answer.
The adjusted basis on the date of disposal in the federal book, which is cost less all depreciation allowed or allowable (the depreciation you could have taken counts even if you did not); the proceeds and the expenses of sale; the character of the asset, section 1245 or 1250; and the holding period, because section 1231 needs more than a year. A register that keeps the federal book and records the disposal as a dated event with proceeds produces the gain by book, the recapture and the Form 4797 figures; a register that keeps only a book basis produces the ledger entry and leaves the tax character to be reconstructed. The lifecycle page shows the disposal computed in every book before it is recorded.
| When | User | Record | Field | Before | After | Reason |
|---|---|---|---|---|---|---|
| 30 Sep 2026 16:41 | M. Reyes | Period | Period 9 | Open | Depreciation posted | Mass recalculation, 1,203 assets |
| 12 Sep 2026 14:02 | M. Reyes | 10577 | Status | In service | Disposed, sale | Replaced by unit 9 |
| 12 Sep 2026 13:55 | M. Reyes | CIP-0155 | Status | In progress | Capitalised as 10744 | Dock doors in service |
| 10 Sep 2026 09:18 | J. Okafor | 10412 | Federal convention | Half-year | Half-year (re-tested) | 40% rule check, Q3 |
| 03 Sep 2026 11:30 | Import | 27 assets | Created | From AP export 88213 to 88266 | Additions queue approved by J. Okafor | |
| 29 Aug 2026 15:07 | K. Lindqvist | 10240 | Cost | 9,600.00 | 9,840.00 | Freight added, invoice 88266 |
What to record on the asset.
- The disposal date, proceeds and expenses of sale, and the method of disposal (sale, trade, abandonment, casualty).
- The adjusted basis in each book on that date, including depreciation allowable but not taken.
- The character: section 1245 or section 1250 property.
- For a partial disposal, the share removed and how it was determined.
- The state basis, where the state book differs, because the state gain differs with it.
In Fixed Asset Desk: a disposal is computed in all four books with section 1245 and 1250 recapture before it is recorded, and the disposal report carries the Form 4797 figures.
Sources: Internal Revenue Code sections 1245, 1250, 1231 and 291; Form 4797 (Sales of Business Property) and instructions; Publication 544 (Sales and Other Dispositions of Assets). Checked 20 September 2026.