Unrecaptured Section 1250 Gain

What is the 'Unrecaptured Section 1250 Gain'

The unrecaptured section 1250 gain is a type of depreciation-recapture income that is realized on the sale of depreciable real estate. Unrecaptured Section 1250 income is taxed at a 25% maximum capital-gains rate, or less in some cases. Unrecaptured Section 1250 gains are only realized when there is a net Section 1231 gain that is not subject to recapture as ordinary income.

BREAKING DOWN 'Unrecaptured Section 1250 Gain'

Unrecaptured section 1250 gains and losses are not reported on Schedule D, but on worksheets within the Schedule D instructions, and are carried to the 1040.

A section 1250 gain is recaptured upon the sale of depreciated real estate, just as with any other asset; the only difference is the rate at which it is taxed. The gain is used to offset previously used depreciation allowances, which are not optional in nature. While the gains attributed to depreciation are taxed at the capital gains tax rate, any remaining gains are only subject to the long-term capital gains rate of 15%. Assets that do not qualify under Section 1250 are taxed at a different rate.

Example of Unrecaptured Section 1250 Gains

If a property was initially purchased for $150,000, and the owner claims a depreciation of $30,000, the basis for the property is considered to be $120,000. If the property is subsequently sold for $175,000, the owner has received an overall gain of $65,000 over the basis value. Since the property has sold for more than the basis that had been adjusted for depreciation, the initial gains are recaptured based on the original purchase price of $150,000. This makes the first $30,000 of the profit subject to the unrecaptured section 1250 gain, while the remaining $35,000 is considered regular long-term capital gains. With that result, $30,000 would be subject to the higher capital gains tax rate of up to 25%. The remaining $35,000 would be taxed at the long-term capital gains rate of 15%.

Unrecaptured Section 1250 Gains and Capital Losses

Since the unrecaptured section 1250 gains are considered a form of capital gains, they can be offset by capital losses. In order to do so, the capital losses must be reported through Form 8949 and Schedule D, and the value of the loss may vary depending on if it is determined to be short-term or long-term in nature. In order for a capital loss to offset a capital gain, they must both be determined to be short-term or long-term. A short-term loss cannot offset a long-term gain, and vice versa.

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