# Section 1250 Property

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```					    Section 1231

Steven M. Foulks, CPA, CFP
Section 1231 Benefits

Section 1231 gives the users of business
property the best of all worlds:
If the property is sold at a loss, it is treated as
an ordinary loss
max tax rate applied to the loss is 39.6%
no limit on loss deduction
If the property is sold at a gain, potentially
taxed as LTCG (lower tax rate)
Depreciation Recapture

   Before we discuss 1231 property it is
appropriate to discuss Sections 1245 &
1250 depreciation recapture
 Depreciation       recapture characterizes
gains that would otherwise be Section 1231
gains as ordinary gains. The reason for
depreciation recapture is best illustrated by
an example.
Depreciation Recapture

   Steve Foulks bought a new computer on
December 20, 1997, for \$5,000. He uses
the computer in his business. He expensed
the whole amount under code section 179.
Being in the 39.6% marginal tax bracket, he
saved \$1,980.
   His after tax computer cost was \$3, 020.
Depreciation Recapture

   On December 31, 1998, Steve sells the
computer for \$3,775. Since this property was
the only property he sold, and it is Sec. 1231
property, he received LTCG treatment (20% tax
rate), so the tax paid on the gain was \$755.
   The net after tax cost to Steve was \$0!!
• AT cost        = \$5,000 - \$1,980 = \$3,020
• AT sales proceed= \$3,775- \$755 = \$3,020
Depreciation Recapture

   Without depreciation recapture rules there
would have been no net cost to Steve for using
the computer for one year - the ultimate tax
stimulus to encourage purchase of equipment.
   Although congress wants to encourage business
to buy equipment, it did not intend to give that
much encouragement - hence the depreciation
recapture rule
Depreciation Recapture

Simply speaking what depreciation recapture
 To the extent that you received an ordinary
income benefit (i.e., depreciation, etc.) on a
 the gain on its sale will receive ordinary income
treatment.
Depreciation Recapture

 In my example previously the tax paid on
the sale at \$3,775 would be \$1,495, not
\$755.
 Thus there would be an after tax cost of
ownership of \$740.
Section 1245 Recapture

Depreciation recapture for
Section 1245 property
• Applies to tangible and intangible personalty, and
nonresidential realty using accelerated methods of
ACRS (placed in service 1981-86)
• Recapture potential is entire amount of accumulated
depreciation for asset
• Method of depreciation does not matter
Section 1245 property

   Steps in the 1245 gain process:

   1st calculate realized gain

   2nd - calculate 1245 gain
Section 1245 gains

   1245 gain =
the    lesser of

1   depreciation taken, or

2   realized gain
Section 1245 gains

   3rd - determine the recognized
gain
• realized gain less deferred gain
• Any gain recognized is first applied
to ordinary gains (1245), balance
to 1231 gains
• 1245 & 1231 attributes carryover
Section 1245 gains

4th - determine the 1231 gain

   Realized gain less 1245 gain

=   1231 gain (10% to 20% rates apply)
Section 1245 gains

To have a 1231 gain, on 1245

property, the property must be sold

for more than it cost. How likely is

that?
Section 1250 Property

Section 1250 property
• Residential real property
placed into service before
1987
• Nonresidential real property
placed into service before
1981, and miscellaneous real
property
Section 1250 Recapture

Depreciation recapture potential
Recapture potential is limited to
excess of accelerated
depreciation taken on asset in
prior years over straight-line
depreciation for same period
Section 1250 Recapture

Straight-line depreciation on real
property
• If straight-line depreciation has
been taken on real property, no
depreciation recapture potential
exists under Section 1250
• All real estate property acquired
after 1986 must use straight-line
depreciation
Section 1250 property

   Steps in the 1250 gain process:

   1st calculate realized gain

   2nd - calculate 1250 gain
Section 1250 gains

   1250 gain
the    lesser of

1   excess depreciation taken, or

2   realized gain
Section 1250 gains

3rd - determine the recognized gain
• realized gain less deferred gain
• Any gain recognized is first applied
to ordinary gains (1250), balance to
1231 gains
• 1250 & 1231 attributes carryover
Section 1250 gains

4th - determine the 1231 gain

   Realized gain less 1250 gain

=   1231 gain (25% rate applies)
Section 1231 Assets
Section 1231 assets defined
   Depreciable and real property used
in a business or for production of
income and held more than 1 year
   Includes timber, coal, iron, livestock,
unharvested crops
   Includes net gains (but not net
losses) on nonpersonal use capital
assets from casualties or thefts (net
losses are ordinary losses)

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