12755 summary of section 1245 recapture recapture

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¶12,755 Summary of Section 1245 Recapture Recapture rules for Section 1245 property are briefly reviewed. Depreciation Recapture—Section 1250 ¶12,801 Definition of Section 1250 Property Section 1250 property is depreciable real property that is not Section 1245 property and, like Section 1245 property, is a subcategory of depreciable Section 1231 property. It consists mainly of buildings and their structural components as well as other depreciable real property. ¶12,815 Purpose of Rules The purpose of Section 1250 is to prevent taxpayers from receiving the full benefits of accelerated depreciation and long-term capital gain treatment through Section 1231 at the time of sale of the property. Under the Taxpayer Relief Act of 1997, unrecaptured Sec. 1250 gain is taxed at a rate of 25 percent and is the amount of the long-term capital gain that would be treated as ordinary income if Section 1250(b)(1) included all depreciation taken with an applicable percentage of 100 percent. Only gain from Section 1250 property held for more than 12 months is taken into account. In less complex language, all or a portion of the recognized gain from the sale or exchange of depreciable real property is to be recaptured. This is determined by treating the property as if it were depreciable personal property (i.e., Section 1245 property) and is taxed at a maximum rate of 25 percent. The remaining gain would be 15 percent gain, assuming that it was not offset by losses in the Section 1231 and capital nettings. ¶12,825 Nonresidential Real Property—Pre-1981 Acquisitions For nonresidential real property, the recapture potential is 100 percent of the amount of the excess depreciation taken after December 31, 1969. The amount actually recaptured as ordinary income is the lesser of the amount of excess depreciation or the gain recognized. If there is excess recognized gain above the amount recaptured as ordinary income as a result of the “excess depreciation” calculation, any unrecaptured depreciation will be taxed at the maximum rate of 25 percent. If there is then still any excess recognized gain, it is 15 percent gain. If straight-line depreciation was used, there is recapture to the extent of total depreciation taken (taxed at the maximum rate of 25 percent) but not to exceed recognized gain. ¶12,835 Nonresidential Real Property—ACRS Under ACRS, real property may be depreciated using the prescribed (accelerated) method or the optional straight-line method. If the taxpayer uses the accelerated method, gain is treated as ordinary income to the extent of total depreciation taken. Thus, by using accelerated cost recovery or depreciation, the taxpayer is subject to the more severe recapture rules of Section 1245. Even if the optional straight-line depreciation method was used, there is recapture of total depreciation (but not to exceed recognized gain), which is taxed at a maximum rate of 25 percent. Any remaining recognized gain is then 15 percent gain.

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