What is IRS code 1240?

IRS Code Section 1240 pertains to the taxation of gains from the sale of certain types of capital assets, specifically those related to "section 1250" property, which typically includes depreciable real estate. Under this code, any gain realized on the sale of such property is treated as ordinary income to the extent of depreciation deductions taken. This means that while the overall gain may be long-term, the portion attributable to depreciation is taxed at higher ordinary income rates rather than capital gains rates.