7904 / How is gain or loss on sale of leased equipment treated?

The amount realized on the sale or other disposition of property in excess of adjusted basis is gain; if the amount realized is less than adjusted basis, it is loss.¹ The basis of property is generally its cost reduced by the portion of cost which the taxpayer elects to treat as an expense (see Q 7895) and by the basis adjustment attributable to any investment tax credit (see Q 7894).² Also, the basis is reduced each year by the amount of the depreciation taken so that the adjusted basis in the property reflects accumulated depreciation deductions. If depreciation is not deducted, the basis must nonetheless be reduced by the amount of depreciation allowable.³ If the investment tax credit is recaptured in connection with property as to which a basis adjustment was required, then the basis is increased by such recaptured amount.⁴

Where leased equipment has been depreciated, gain on the sale of the property must be treated as ordinary income to the extent of all depreciation deductions allowed.⁵ The gain in excess of the recaptured ordinary income is “IRC Section 1231” gain; loss is “IRC Section 1231” loss. See Q 7834 for an explanation of the treatment of IRC Section 1231 gains and losses. See Q 667 if the equipment is sold on the installment method.

1. IRC § 1001.