CandleFocus Glossary Editor
Section 1250 of the United States Internal Revenue Code is an important tool used to determine the taxable gains associated with the sale of depreciated real estate. The section establishes that, when applicable, the gains derived from such sales will be taxed as ordinary income by the IRS, as long as the accumulated depreciation, resulting from the use of the accelerated depreciation method, exceeds the amount of depreciation that would be calculated using the straight-line method.
Section 1250 applies primarily to corporations, but these rules will also apply to non-corporate entities such as partnerships and trusts. The profits on the sale of depreciated real estate must be the proceeds from the sale less any cost of the sale or other costs associated with the transaction, such as real estate commissions and transfer taxes, less the basis of the property. This basis is typically the original purchase price plus any capital improvements made over the time that the entity owned the real estate.
The amount of depreciation taken by an entity is also important to determining whether a gain pursuant to section 1250 is taxed at ordinary income or capital gains rates. For example, if an entity purchased a building for $100 and depreciated the building over 10 years, based on an accelerated depreciation schedule, it may have claimed a total depreciation deduction over those 10 years of $60. Thus, the basis in the building, after the 10 years of depreciation, is $40. Therefore, if the building is sold, any proceeds over the basis of $40 would be subject to taxation according to Section 1250.
For entities who have invested in property that was not depreciated, such as residential rental property, section 1250 does not apply as the depreciation is calculated using the straight-line method. In this type of situation, the gain on the sale of the real estate is taxed as a capital gain and not an ordinary income tax.
At bottom, Section 1250 of the United States Internal Revenue Code governs the taxation of the sale of certain depreciated real estatethat has been held by an entity longer than one year. When applicable, under section 1250, the profit on the sale of the depreciated real estate will be taxed as ordinary income, rather than capital gains. Therefore, it’s important for companies to be aware of this section when deciding how to depreciate their property and also to determine the proper taxation of any resulting profits.
Section 1250 applies primarily to corporations, but these rules will also apply to non-corporate entities such as partnerships and trusts. The profits on the sale of depreciated real estate must be the proceeds from the sale less any cost of the sale or other costs associated with the transaction, such as real estate commissions and transfer taxes, less the basis of the property. This basis is typically the original purchase price plus any capital improvements made over the time that the entity owned the real estate.
The amount of depreciation taken by an entity is also important to determining whether a gain pursuant to section 1250 is taxed at ordinary income or capital gains rates. For example, if an entity purchased a building for $100 and depreciated the building over 10 years, based on an accelerated depreciation schedule, it may have claimed a total depreciation deduction over those 10 years of $60. Thus, the basis in the building, after the 10 years of depreciation, is $40. Therefore, if the building is sold, any proceeds over the basis of $40 would be subject to taxation according to Section 1250.
For entities who have invested in property that was not depreciated, such as residential rental property, section 1250 does not apply as the depreciation is calculated using the straight-line method. In this type of situation, the gain on the sale of the real estate is taxed as a capital gain and not an ordinary income tax.
At bottom, Section 1250 of the United States Internal Revenue Code governs the taxation of the sale of certain depreciated real estatethat has been held by an entity longer than one year. When applicable, under section 1250, the profit on the sale of the depreciated real estate will be taxed as ordinary income, rather than capital gains. Therefore, it’s important for companies to be aware of this section when deciding how to depreciate their property and also to determine the proper taxation of any resulting profits.