Saturday, December 26, 2009

What Are Section 1231, 1245, and 1250 Property

Question: What Are Section 1231, 1245, and 1250 Property? What are the tax effects of each?

Answer: Section 1231 property is defined as depreciable and real property (including land) that is held for more than a year. 1231 property does not include assets held for resale, such as inventory. Section 1231 tax effects provide the best of both worlds from a taxation standpoint - losses are ordinary losses and gains are considered capital gains. If the net of asset sales on 1231 property exceed cost - the gain is a capital gain. If the net is a loss - it is an ordinary loss.

1245 property, includes depreciable assets held by a business for intergral use. If the property has been depreciated, the recapture of depreciation is ordinary income, with any gain in excess of depreciation recapture considered a capital gain. For instance. If a $100,000 asset is purchased and depreciation equals $50,000, upon sale of property, the first $50,000 of gains are taxed at ordinary tax rates, and any gain in excess of purchase price is taxed as a capital gain.

1250 property includes real estate and real property subject to depreciation that is, and has not been, section 1245 property. 1250 propety is taxed similiarly to 1245 property with the recapture of depreciation. For instance if a commercial property is purchased for $1,500,000 and depreciation upon sale of property is $500,000, then the gain from $1,000,000 (adjusted basis after depreciation) is taxed a capital gains rates of 25%. If the sale price is $2,500,000 then $1,000,000 (the difference between purchase price and sale price) would be taxed at regular capital gains rates of 15%.

6 comments:

  1. I don't think you Sec 1250 example is correct. Depr is recaptured at ordinary rates. Only depr in excess of straight line is at 25%, isn't it?

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  2. You are correct, Fred. The Section 1250 paragraph needs to be corrected.

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  3. The paragraph is a bit convoluted, but correct. The amount of depreciation that was taken is recaptured at 25%. The amount of gain over depreciation taken is taxed at the regular long-term capital gains rate (15% or 20% depending on the taxpayer). Note, Fred lists $1,000,000 as 15% gain. The total gain in the example is $1,500,000. The other $500,000 of gain is recapture taxed at 25%.

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  4. Unknown, then doesn't that make the paragraph incorrect? The $1M is not taxed at 25% as written.

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  5. Fred is incorrect. For 1250 property - 'additional depreciation' (depreciation in excess of straight-line depreciation) is taxed at ordinary rates. The recapture of depreciation equal to straight-line depreciation is taxable @ 25%

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  6. Fred is incorrect. For 1250 property - 'additional depreciation' (depreciation in excess of straight-line depreciation) is taxed at ordinary rates. The recapture of depreciation equal to straight-line depreciation is taxable @ 25%

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