Observation: Section 1245 recapture is generally more significant than Section 1250 recapture for two reasons. First, Section 1245 recapture occurs whenever non-Section 1245 property is received in a like-kind exchange, regardless of whether Section 1245 property is also received. Section 1250 recapture can be avoided if enough Section 1250 property (i.e., property worth at least the amount of the potential recapture) is received in the exchange. Also, for most real property placed in service after 1986, there is no Section 1250 recapture because straight-line (SL) depreciation is required and Section 1250 recapture is generally the excess of depreciation taken over the amount allowed using SL. Therefore, Section 1245 recapture continues to be an issue since it applies to all depreciation claimed, rather than only to the excess of accelerated depreciation over SL.

 Caution: The Section 1245 recapture rule can cause unexpected results when the property exchanged is ACRS nonresidential real property (i.e., placed in service between 1981 and 1986) for which accelerated ACRS depreciation was used. Under IRC Sec. 1245(a)(5), before repeal by TRA ’86, such property was treated as Section 1245 recovery property (rather than Section 1250 property, which normally applies to depreciable real property). Consequently, the exchange of such property for other real estate is likely to be an exchange of Section 1245 property for Section 1250 property (i.e., non-Section 1245 property), causing recapture income.