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1250 gain


									                    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
       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 losses.
             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) depreciation.
      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

                               ii. Unrecaptured Section 1250 gain
                                   is Section 1231 gain subject to
                                   25% maximum tax rate to the
                                   extent of straight-line
                                   depreciation. (Post 5-6-1977)
                              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 held.
           iii. Five-year lookback rule defeats the timing
                strategy of taking all capital gain treatment one
                year and all ordinary loss treatment the next
                   1. Any net Sec. 1231 gain is ordinary gain to
                      the extent of nonrecaptured Sec. 1231
                      losses from the previous five years.
                   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 estate.
      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
      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 basis.


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