So, what is Section 1245 property…really?
A common misconception that Internal Revenue Code (IRC) Section 1245 property embodies only personal property is simply not true. While Section 1245 property certainly includes all types of personal property, it also includes specific types of real property. For an asset to be classified as Section 1245 property it must be depreciable. Another way to say it, the asset must be amortizable. It can either be personal or real, tangible or intangible.
The power of an asset being classified as Section 1245 property is much, if not all of the gain on the property’s disposal will be treated as ordinary income under the rules for depreciation recapture. How sweet it is!
When cost segregation is employed to take advantage of IRC Section 1245 property, everybody wins! You see, the IRS allows for a change in the method of depreciation claimed on property by filing Form 3115. When the 3115 is filed with a cost segregation study it is granted automatic consent protocol. That means whatever assets are reallocated to Section 1245 status is automatically accepted as factual. The IRS does not challenge the reallocation.
So, what does this really mean when the rubber hits the road? Since the IRS says that every commercial property has Section 1245 assets within it, why not take advantage of it? The IRS is granting approval for any commercial property owner to employ cost segregation to change asset values to Section 1245 status. Doing so accelerates the depreciation from 39-years to 5- or 7-years depending upon the type of business occupying the building. And by the way, tenant improvements (leasehold improvements) also qualify for accelerated depreciation into Section 1245 property status!
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