Section 1245 Recapture
This requires any recognized gain to be treated as "ordinary income" to the extent of depreciation taken on the property disposed of up to the gain recognized. This includes ALL modified accelerated cost recovery system (MACRS) property, except residential real property (27.5 year class) and nonresidential real estate (39 year class).
Types of Section 1245 Property includes depreciable:
- Personal property
Any gain above the recapture amount is treated as a capital gain.
The exam will sometimes refer to "depreciation taken" as "cost recovery deductions (CRD)"
Sue purchased equipment at $20,000 to use in her business. She has taken $9,500 in depreciation on the equipment. In January, she sold the equipment for $22,000. How much of the gain must be recaptured as Section 1245 gain, and how much is treated as Section 1221 capital gain?
Original Cost - $20,000
Sale Price - $22,000
Depreciation - 9,500
Less Adj. Basis - 10,500
Adjusted basis - $10,500
Gain - $11,500
Section 1245 Gain= $9,500 (same as depreciation amount) - treated as ordinary income
Section 1221 Gain= $2,000 ($11,500- $9,500) - treated as capital gain
Section 1250 Recapture
This recapture provision was established to prevent individuals from receiving both long-term capital gain treatment, and receiving accelerated depreciation benefits on the same property. This property is the depreciable real estate property.
Treatment of Gains:
25% maximum capital gains rate (gains applied to straight-line depreciation)
20% capital gains rate (any gains not attributable to depreciation)
Personal FinanceHow the depreciation tax rule can assist real estate investors.
Managing WealthIt's a bit tricky, but a valuable tool to make your investment pay off.
Personal FinanceStep-by-step, how to fill out the depreciation and amortization form for your business tax return.
InvestingCompanies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
MarketsSection 1231 property is depreciable business property that’s held for a year or longer.
Personal FinanceThe declining balance method is a system for calculating an asset’s rate of depreciation against its non-depreciated balance.
TradingCurrency depreciation occurs when a currency’s value falls in comparison to other currencies.
TradingFind out how you can build wealth and reduce your taxes.
InvestingThe double declining balance depreciation method counts the depreciation of a long-lived asset’s book value at double the rate of its straight-line depreciation.
Personal FinanceBeing a landlord can be taxing, especially when you want to sell. Find out how to reduce your burden.