What Is an Unrecaptured Section 1250 Gain?

An unrecaptured 1250 gain is a gain addressed by Section 1250 of the U.S. Inter🅷nal Revenue Code. This provision directs that previously recognized depreciation be recaptured as income when a gain is realized on the sale of depreciable real estate pro🐠perty.

Such gains are taxed at a maximum 25% tax rate, though the rate is less in some cases. The gains, and the taxes on them, are calculated on a worksheet within the instructions for Internal Revenue Service (IRS) Schedule D, reported on Schedule D, and carried through to the taxpayer’s 1040.

How Unrecaptured Section 1250 Gains Work

Section 1231 assets include all depreciable 澳洲幸运5官方开奖结果体彩网:capital assets held by a taxpayer for longer than one year. Section 1231 relates to assets addressed by Section 1245 and Section 1250, and the latter is what determines the tax rate of 澳洲幸运5官方开奖结果体彩网:depreciation recapture.

Section 1250 relates only to real property, such as buildings and land. Personal property, such as machinery and equipment, is subject to depreciation recapture as 澳洲幸运5官方开奖结果体彩网:ordinary income under 澳洲幸运5官方开奖结果体彩网:Section 1245.

Recognition of Gains

Unrecaptured Section 1250 gains are only realized when there is a net 澳洲幸运5官方开奖结果体彩网:Section 1231 gain. In essence, capital losses on all depreciable assets offset unrecaptured Section 1250 gains on real estate. Therefore, a net capital loss overall reduces the unrecaptured Section 1250 gain to zero.

A Section 1250 gain is recaptured upon the sale of depreciated real estate, just as with any other as🌺set; the only difference is the rate at which it is taxed.

Reason for the Rule

The justification for the gain is to offset the benefit of previously used depreciation allowances. While the gains attributed to accumulated depreciation are taxed at the section 1250 recapture tax rate, any remaining gains are only subject to the long-term 澳洲幸运5官方开奖结果体彩网:capital gains rate of 15%.

Example of Unrecaptured Section 1250 Gains

If a property was initially purchased for $150,000, and the owner claims depreciation of $30,000, the adjusted cost basis for the property is considered to be $120,000.

$150,000 - $30,000 = $120,000

If the property is subse꧙quently sold for $185,000, the owner recognizes an overall gain of $65,000 over ꦑthe adjusted cost basis.

$185,000 - $120,000 = $65,000

Since the prop🌄erty sold for more than the basis that was adjusted for depreciation, the unrecaptured Section 1250 gains are based on th༺e difference between the adjusted cost basis and the original purchase price.

$150,000 - $120,000 = $30,000

This makes the first $30,000 of the profit subject to th🔥e unre💮captured Section 1250 gain, while the remaining $35,000 is taxed at the regular long-term capital gains rate.

$65,000 - $30,000 = $35,000

As a re♍sult, $30,000 is subject to the higher capital gains tax rate of up to 25%. The remaining $35,000 is taxed at the long-term capital gains ratꦿe of 15%.

Special Considerations

Offsetting Gains

Since the unrecaptured Section 1250 gains are considered a form of 澳洲幸运5官方开奖结果体彩网:capital gains, they can be offset by capital losses. These capital losses must be reported through 澳洲幸运5官方开奖结果体彩网:Form 8949 and Schedule D. The value of a loss may vary depending on whether it is determined to be short-term or long-term in nature.

Property Changes

Investors can avoid paying tax on depreciation recapture by turning a residential property into a primary residence. The taxpayer could also conduct a 澳洲幸运5官方开奖结果体彩网:1031 like-kind exchange. This type of exchange is tax-deferred but not tax-free.

Inheritance

When a property owner passes away, their heirs often receive the property on a 澳洲幸运5官方开奖结果体彩网:stepped-up basis. This means that the cost basis of the inherited property is adjusted to its fair market value at the time of the former owner’s death. By increasing the basis, the system decreases the amount of tax t🐟he property’s new owners will have to pay on any gains realized by an eventual sale.

The Bottom Line

A Section 1250 gaꦫin refers to the taxable gain from the sale of depreciable real property. The recognition of the gain is governed by Section💝 1250 of the Internal Revenue Code (IRC), which deals with the tax treatment of depreciation recapture.

When a property owner sells a depreciable asset, the IRS requires the owner to recapture a portion of the depreciation claimed on the property over the years. The recaptured amount is taxed at a special rate known as the🀅 Section 1250 recapture rate, which is generally 25%.