section 1250 property by abe20

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									                  Federal Taxation 2003
                        Chapter 13
                  Property Transactions
                 Section 1231 & Recapture

I.     Section 1231 Property (favored capital gain
       treatment and ordinary loss treatment)
       a. Real or depreciable property used in a trade or
          business held for more than a year.
              i. Held for less than 1 year provides ordinary
                 gain or loss.
       b. Timber, Coal, Domestic iron ore, livestock, and
          unharvested crops.
II.    Involuntary Conversions
       a. Gains and losses from condemnations of Sec.
          1231 property and capital assets used in a trade
          or business held more than 1 year are Sec. 1231
          gain and losses.
       b. Gains and losses from casualty or theft (fire,
          hurricane, etc.) require a netting computation.
              i. If these recognized losses exceed recognized
                 gains then treated as ordinary gains and
             ii. If these recognized gains exceed recognized
                 losses then they are classified as Sec. 1231
                 gains and losses.
            iii. P -13-38
III.   Section 1231 Netting – See separate handout.
       a. P 13-33,36
       b. Mitigation of 1231 benefit of capital gain favorable
          treatment and ordinary loss treatment.
              i. Section 1245 recapture avoids the double
                 advantage of depreciating property and
                 taxing the gain at a special capital gain rate.

      1. Sec 1245 property includes: depreciable
         personal property like equipment,
         automobiles, livestock, intangibles
         subject to amortization.
      2. Sec 1245 property realized gain (doesn’t
         apply to losses) is ordinary to the extent
         of depreciation, any remaining gain is
         1231 gain (capital gain treatment)
      3. Non-residential real estate placed in
         service between 1981 and 1986 is Sec.
         1245 property subject to recapture of
         only ACRS (not straight-line)
      4. P 13-42
ii. Section 1250 property
      1. All depreciable real property (except # 3
      2. Section 1250 property realized gain is
         ordinary to the extent of excess
         depreciation taken, any remaining gain
         is 1231 gain (capital gain treatment)
            a. Post 1986 real property MACRS
               requires straight-line so no excess
      3. Unrecaptured Section 1250 gain is Sec.
         1231 gain to the extent of straight-line
         depreciation. This gain is taxed at a
         maximum of 25% while the capital gain
         rate is 20% or 10%.
            a. So, for Section 1250 property
                  i. Recapture excess
                     depreciation of realized gain
                     as ordinary income.

                             ii. Unrecaptured Section 1250
                                 gain is Section 1231 gain
                                 subject to 25% maximum tax
                                 rate to the extent of straight-
                                 line depreciation. (Post 5-6-
                            iii. Remainder or selling price >
                                 cost is Section 1231 gain or
                            iv. P 13-53-54
                        b. Real Estate Transition Periods.
                              i. Residential Rental Property
                                    1. 1250 recapture excess
                                       depreciation after 1975.
                                    2. Low-Income Housing
                                       provides a reduced
                                       recapture % (1%
                                       reduction per month
          iii. Five-year lookback rule defeats the timing
               strategy of taking all capital gain treatment
               one year and all ordinary loss treatment the
               next year.
                  1. Any net Sec. 1231 gain is ordinary gain
                     to the extent of nonrecaptured Sec.
                     1231 losses from the previous five
                  2. P 13-39
IV.   Recapture Provision- Special issues
      a. Gifts- Donor passes the recapture to donee.
      b. Recapture dies with owner-not transferred by

c. Charitable Contributions deductibility is reduced by
d. Like-kind-exchange can be used to defer
   recapture. Any boot received triggering gain will
   first be recaptured as ordinary income.
e. Involuntary conversion-any unreinvested amount
   realized will trigger gain and recapture.
f. Installment sales- recall that any recaptured gain
   in recognized in year of sale.
g. Sec 179- First year expensing assets converted to
   personal use requires taxpayer to recognize
   income of excess depreciation.
h. Conservation and Land Clearing Expenditures- the
   special expensing of these costs need to be
   recaptured if disposed of before 9 years.
       i. P 13-59
i. Intangible Drilling Costs and Depletion are
   recaptured to the extent of realized gain- on sale
   of property.
       i. P 13-61
j. Related party property sales.
       i. If property is depreciable the gain recognized
          is ordinary. Prohibits related parties from
          getting 1231 gain treatment and a step-up in


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