Chapter 13 Property Transactions Section 1231 and Recapture
Chapter 13 Property Transactions: Section 1231 and Recapture
Learning Objectives Identify Sec. 1231 property Understand the tax treatment for sec 1231 transactions Apply the recapture provisions of sec.1245 Apply the recapture provisions of sec.1250 Describe other recapture applications
Learning Objectives • Identify Sec. 1231 property • Understand the tax treatment for Sec. 1231 transactions • Apply the recapture provisions of Sec. 1245 • Apply the recapture provisions of Sec. 1250 • Describe other recapture applications
Tax Treatment for Sec. 1231 Sec. 1231 gains are netted against sec 1231 losses Net Gains treated as LTCG Net Losses- Treated as ordinary loss Five year Look-back rule -any net Sec 1231 gain is ordinary to the extent of any nonrecaptured net Sec. 1231 losses from previous five years Tax rate for Sec. 1231 gain could be 20% or 10%
Tax Treatment for Sec. 1231 • Sec.1231 gains are netted against Sec. 1231 losses • Net Gains treated as LTCG • Net Losses – Treated as ordinary loss. • Five year Look-back rule – any net Sec. 1231 gain is ordinary to the extent of any nonrecaptured net Sec. 1231 losses from previous five years. • Tax rate for Sec.1231 gain could be 20% or 10%
Section 1231 Defined Real property or depreciable property used in a trade or business for more than one year Certain types of property do not qualify as Sec. 1231 property Musical composition Inventory Copyright Letters or memorandum
Section 1231 Defined • Real property or depreciable property used in a trade or business for more than one year • Certain types of property do not qualify as Sec. 1231 property – Musical composition – Inventory – Copyright – Letters or memorandum
Section 1231 Defined Congress extended sec 1231 treatment to transactions involving: Timber Coal Livestock Land with unharvested crops
Section 1231 Defined • Congress extended Sec. 1231 treatment to transactions involving: – Timber – Coal – Livestock – Land with unharvested crops
Involuntary Conversions Condemnations Gains and losses from condemned Sec. 1231 property and non-personal condemned capital asset treated as Sec 1231 gains and losses Other involuntary conversions A net gain from casualties and theft is treated as sec. 1231 gain Net losses on Sec. 1231 property from casualties and theft is treated as ordinary Income
Involuntary Conversions • Condemnations – Gains and losses from condemned Sec. 1231 property and non-personal condemned capital asset treated as Sec. 1231 gains and losses – Other involuntary conversions – A net gain from casualties and theft is treated as Sec. 1231 gain – Net losses on Sec. 1231 property from casualties and theft is treated as ordinary income
Procedure For sec. 1231 Following steps are necessary to determine Sec. 1231 treatment All non-personal casualty and theft gains are netted If net loss, there is ordinary treatment If net gain, the amount is included in the regular Sec. 1231 netting Determine the net amount of Sec. 1231 gain or loss, by including net gain from step 1 If this netting results in a net gain, the gain is treated as a net long-term capital gain If the netting results in a net loss, it is treated as ordinary loss
Procedure For Sec. 1231 • Following steps are necessary to determine Sec. 1231 treatment • All non-personal casualty and theft gains are netted – If net loss, there is ordinary treatment – If net gain, the amount is included in the regular Sec. 1231 netting • Determine the net amount of Sec. 1231 gain or loss, by including net gain from step 1 • If this netting results in a net gain, the gain is treated as a net long-term capital gain **** • If the netting results in a net loss, it is treated as ordinary loss
Recapture Provisions Of Section 1245 A gain from disposition of Sec. 1245 property is treated as ordinary to the extent of depreciation taken Purpose of Sec. 1245 To recapture ordinary deductions as ordinary income Sec.1245 is a characterization provision
Recapture Provisions Of Section 1245 • A gain from disposition of Sec. 1245 property is treated as ordinary to the extent of depreciation taken • Purpose of Sec. 1245 – To recapture ordinary deductions as ordinary income – Sec. 1245 is a characterization provision
Section 1245 Property Most common example of Sec. 1245 property is depreciable personal property · Commercial rea property acquired between 1981 and 986 which was subject to ACRS is subject to Sec. 1245 recapture
Section 1245 Property • Most common example of Sec. 1245 property is depreciable personal property • Commercial real property acquired between 1981 and 1986 which was subject to ACRS is subject to Sec. 1245 recapture
Recapture Provisions Of Section 1250 Purpose of Sec. 1250 Convert a portion of the gain on sale of certain depreciable real property into ordinary income
Recapture Provisions Of Section 1250 • Purpose of Sec. 1250 –Convert a portion of the gain on sale of certain depreciable real property into ordinary income