Unrecaptured Section 1250 Gain
Candlefocus EditorThe Income Tax section 1250 of the IRC requires the taxpayer to recapture a portion of the gain associated with their prior depreciation deductions. As a result, the taxpayer must add back a portion of the gain associated with prior depreciation deductions when reporting their gain on the sale of the property. The IRC also states that the tax rate for Unrecaptured Section 1250 Gain is 25 percent.
To calculate the Unrecaptured Section 1250 Gain, the taxpayer must begin by calculating the original cost basis of the property and look at any depreciation that was taken. Next, the taxpayer then subtracts the cost basis of the property from the sale price to determine the total gain from the sale. The portion of the gain associated with prior depreciation deductions is then calculated by multiplying the depreciation taken by the total gain from the sale. The result of this calculation will be the Unrecaptured Section 1250 Gain, which is then subject to an ordinary income tax rate of 25 percent.
The Unrecaptured Section 1250 Gain can be offset by capital losses from 1231 investments. A 1231 investment is any capital asset that produces rental or business income, such as rental properties or businesses. To calculate a potential offset, the taxpayer must begin by tallying up the sum of all net capital losses from 1231 investments over the past three years. The Unrecaptured Section 1250 Gain then must be reduced by the total capital losses from 1231 investments above, thus reducing the portion of the gain that is taxable.
In conclusion, Unrecaptured Section 1250 Gain is a tax provision that applies to the sale of depreciable real estate and is designed to recapture a portion of the gain related to prior depreciation deductions. Unrecaptured Section 1250 Gain is subject to a 25 percent ordinary income tax rate and can be offset by 1231 capital losses.