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Section 179(f) Deductions and Recapture of Costs of Qualified Real Property

With the extension and fast-approaching expiration of the section 179 cost-expensing for qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property), the IRS has provided guidance for computing the deduction and accounting for the recapture of such deductions on the disposition of qualified real property. This article explains how real property costs expensed under section 179(f) result in section 1245 recapture while other gain on the sale can qualify for favorable treatment under section 1231. It also illustrates the application of the multiple-step process for bifurcating such gain under methods prescribed by the IRS. Because the different methods can produce different results that affect the tax consequences of the disposition, property owners and their tax advisors must test the results for each piece of qualifying property and choose the most appropriate method, depending upon those results.