Key Takeaways
- Tax on depreciation gain from selling real property.
- Tax rate capped at 25%, higher than capital gains.
- Applies only to straight-line depreciation on long-term real estate.
- Reported using Schedule D and Form 4797.
What is Unrecaptured Section 1250 Gain?
Unrecaptured Section 1250 gain refers to the portion of gain from the sale of depreciable real property that equals the amount of straight-line depreciation previously taken or allowed. This gain is taxed at a maximum rate of 25%, distinct from the lower long-term capital gains rates, to recapture depreciation benefits under IRS rules.
This concept is relevant when you sell property such as rental buildings and need to report the gain properly on your Form 1040.
Key Characteristics
Understanding the primary features of unrecaptured Section 1250 gain helps you manage tax liabilities efficiently.
- Applicable Property: Applies to depreciable real estate, excluding inventory or non-depreciable assets.
- Tax Rate: Gains are taxed at a capped 25% rate, higher than standard capital gains but lower than ordinary income tax rates.
- Calculation: The unrecaptured gain is the lesser of total gain or accumulated straight-line depreciation.
- Holding Period: Property must be held for more than 12 months to qualify for this treatment.
- Reporting: Requires specific worksheets and forms, including Schedule D and potentially Form 4797.
How It Works
When you sell depreciable real estate, depreciation deductions reduce your adjusted basis, increasing your gain. Unrecaptured Section 1250 gain captures the portion of gain equal to straight-line depreciation previously claimed, ensuring it is taxed appropriately.
Unlike full Section 1250 recapture, which taxes excess depreciation at ordinary income rates, this gain is limited to the 25% maximum rate. You determine it by subtracting your adjusted basis from the sale price, then comparing that to your total depreciation taken. The lesser amount is taxed under this rule.
For example, you may use the sale proceeds to calculate total gain and apply depreciation recapture rules, while capital losses from related transactions can offset some of this gain under Section 1231 provisions.
Examples and Use Cases
Here are some practical illustrations of unrecaptured Section 1250 gain in real estate transactions:
- Rental Properties: Selling a building with $79,079 in prior depreciation and $89,079 total gain results in $79,079 taxed at the 25% unrecaptured rate, with the remainder taxed as standard long-term capital gain.
- Real Estate Investment Trusts: Investors in companies like Prologis or Federal Realty Investment Trust may encounter unrecaptured Section 1250 gain when these trusts sell properties and distribute gains.
- Triple Net Lease Properties: Owners of properties managed by companies such as National Retail Properties should be aware of how depreciation affects gain recognition upon sale.
Important Considerations
When dealing with unrecaptured Section 1250 gain, keep in mind that it can increase your tax liability due to its higher tax rate compared to typical capital gains. Proper documentation of depreciation and adjusted basis is essential for accurate calculation.
Additionally, understanding the interplay between ordinary income recapture and capital gains treatment helps you plan sales strategically. Consult relevant IRS instructions and consider professional advice to optimize tax outcomes related to your corporation or personal investments.
Final Words
Unrecaptured Section 1250 gain ensures depreciation deductions are partially taxed at a higher rate when selling depreciable real estate. Review your property’s depreciation history and consult a tax professional to accurately calculate and plan for this tax impact on your sale.
Frequently Asked Questions
Unrecaptured Section 1250 Gain is the portion of gain from selling depreciable real estate that equals the straight-line depreciation previously claimed. This gain is taxed at a maximum rate of 25%, which is higher than the standard long-term capital gains rates.
To calculate Unrecaptured Section 1250 Gain, subtract the property's adjusted basis (original cost minus accumulated depreciation) from the sale price to find total gain. The unrecaptured gain is the lesser of this total gain or the cumulative straight-line depreciation taken.
Unrecaptured Section 1250 Gain is taxed at up to 25% to recapture the depreciation benefits previously claimed on real property. This prevents taxpayers from converting depreciation deductions entirely into lower-taxed capital gains.
It applies to depreciable real estate held for more than 12 months, such as rental buildings. It does not apply to non-depreciable real estate or property held short-term.
You report Unrecaptured Section 1250 Gain using the worksheet in the Schedule D instructions on Form 1040. If Section 1231 applies, it is reported on Form 4797 first, then carried over to Schedule D.
Yes, capital losses under Section 1231 can reduce the amount of Unrecaptured Section 1250 Gain. Additionally, Section 1231 ordinary recapture can further lower this gain.
Unrecaptured Section 1250 Gain is taxed at a maximum rate of 25%, while full Section 1250 recapture taxes excess depreciation as ordinary income at higher rates, up to 37%. Generally, post-1986 property using straight-line depreciation results in unrecaptured gain only.
