[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1245-3]

[Page 361-362]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1245-3  Definition of section 1245 property.

    (a) In general. (1) The term section 1245 property means any 
property (other than livestock excluded by the effective date limitation 
in subparagraph (4) of this paragraph) which is or has been property of 
a character subject to the allowance for depreciation provided in 
section 167 and which is either:
    (i) Personal property (within the meaning of paragraph (b) of this 
section),
    (ii) Property described in section 1245(a)(3)(B) (see paragraph (c) 
of this section), or
    (iii) An elevator or an escalator within the meaning of subparagraph 
(C) of section 48(a)(1) (relating to the definition of section 38 
property for purposes of the investment credit), but without regard to 
the limitations in such subparagraph (C).
    (2) If property is section 1245 property under a subdivision of 
subparagraph (1) of this paragraph, a leasehold of such property is also 
section 1245 property under such subdivision. Thus, for example, if A 
owns personal property which is section 1245 property under subparagraph 
(1)(i) of this paragraph, and if A leases the personal property to B, 
B's leasehold is also section 1245 property under such provision. For a 
further example, if C owns and leases to D for a single lump-sum payment 
of $100,000 property consisting of land and a fully equipped factory 
building thereon, and if 40 percent of the fair market value of such 
property is properly allocable to section 1245 property, then 40

[[Page 362]]

percent of D's leasehold is also section 1245 property. A leasehold of 
land is not section 1245 property.
    (3) Even though property may not be of a character subject to the 
allowance for depreciation in the hands of the taxpayer, such property 
may nevertheless be section 1245 property if the taxpayer's basis for 
the property is determined by reference to its basis in the hands of a 
prior owner of the property and such property was of a character subject 
to the allowance for depreciation in the hands of such prior owner, or 
if the taxpayer's basis for the property is determined by reference to 
the basis of other property which in the hands of the taxpayer was 
property of a character subject to the allowance for depreciation. Thus, 
for example, if a father uses an automobile in his trade or business 
during a period after December 31, 1961, and then gives the automobile 
to his son as a gift for the son's personal use, the automobile is 
section 1245 property in the hands of the son.
    (4) Section 1245 property includes livestock, but only with respect 
to taxable years beginning after December 31, 1969. For purposes of 
section 1245, the term livestock includes horses, cattle, hogs, sheep, 
goats, and mink and other furbearing animals, irrespective of the use to 
which they are put or the purpose for which they are held.
    (b) Personal property defined. The term personal property means:
    (1) Tangible personal property (as defined in paragraph (c) of Sec. 
1.48-1, relating to the definition of section 38 property for purposes 
of the investment credit), and
    (2) Intangible personal property.
    (c) Property described in section 1245(a)(3)(B). (1) The term 
property described in section 1245(a)(3)(B) means tangible property of 
the requisite depreciable character other than personal property (and 
other than a building and its structural components), but only if there 
are adjustments reflected in the adjusted basis of the property (within 
the meaning of paragraph (a)(2) of Sec. 1.1245-2) for a period during 
which such property (or other property):
    (i) Was used as an integral part of manufacturing, production, or 
extraction, or as an integral part of furnishing transportation, 
communications, electrical energy, gas, water, or sewage disposal 
services by a person engaged in a trade or business of furnishing any 
such service, or
    (ii) Constituted a research or storage facility used in connection 
with any of the foregoing activities.

Thus, even though during the period immediately preceding its 
disposition the property is not used as an integral part of an activity 
specified in subdivision (i) of this subparagraph and does not 
constitute a facility specified in subdivision (ii) of this 
subparagraph, such property is nevertheless property described in 
section 1245(a)(3)(B) if, for example, there are adjustments reflected 
in the adjusted basis of the property for a period during which the 
property was used as an integral part of manufacturing by the taxpayer 
or another taxpayer, or for a period during which other property (which 
was involuntarily converted into, or exchanged in a like kind exchange 
for, the property) was so used by the taxpayer or another taxpayer. For 
rules applicable to involuntary conversions and like kind exchanges, see 
paragraph (d)(3) of Sec. 1.1245-4.
    (2) The language used in subparagraph (1) (i) and (ii) of this 
paragraph shall have the same meaning as when used in paragraph (a) of 
Sec. 1.48-1, and the terms building and structural components shall 
have the meanings assigned to those terms in paragraph (e) of Sec. 
1.48-1.

[T.D. 6832, 30 FR 8580, July 7, 1965, as amended by T.D. 7141, 36 FR 
18794, Sept. 22, 1971]