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
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
? 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
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
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
? Sec,1250 defined
– Depreciable real
property not covered
by the Sec,1245
recapture
– Sec,1250 recapture
is not required after
1986,since only
straight-line
depreciation allowed
on such assets
Recapture Rules For
Residential Rental Property
? Pre-1981 acquired
real estate may be
subject to Sec,
1250 recapture
? Rental real estate
is always subject
to Sec,1250
recapture
Recapture Rules For
Nonresidential Real Estate
? Pre-ACRS is subject to Sec,
1250 recapture on all
depreciation taken in
excess of straight-line,
limited by realized gain
? ACRS nonresidential real
estate (acquired between 1-
1-1981 and 12-31-1986) is
subject to Sec,1245
recapture,unless straight-
line recovery was elected
Low Income Housing
? Qualified low-
income housing
may have less
Sec,1250
recapture than
other residential
rental property
Additional Recapture for
Corporations
? Additional recapture under Sec,291
? The additional amount Under Sec 291
is equal to 20% of the difference
between the amount that would be
recaptured if the property was Sec,
1245 property,
Recapture Provisions –
Other Applications
? Gifts of property subject to recapture
? Transfer of property subject to
recapture at death
? Charitable contributions
? Like-kind exchanges
? Involuntary conversions
Recapture Provisions
? Installment sales
? Section 179
? Conservation and land clearing
expenditures
? Intangible drilling costs and depletion
? Gain on sale of depreciable property
between related parties
Tax Planning
Considerations
? For non-corporate taxpayers,Sec,
1231 gains preferable to ordinary
income
? Corporate taxpayers after 1986,it
does not make a difference whether a
gain is classified as Sec,1231 gain or
ordinary income
Compliance And Procedural
Considerations
? Report Sec,1231
gains and losses
on Form 4797
? Report gains
recaptured on
ordinary income
on Form 4797
? Report casualty or
theft gain on Form
4684
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
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
? 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
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
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
? Sec,1250 defined
– Depreciable real
property not covered
by the Sec,1245
recapture
– Sec,1250 recapture
is not required after
1986,since only
straight-line
depreciation allowed
on such assets
Recapture Rules For
Residential Rental Property
? Pre-1981 acquired
real estate may be
subject to Sec,
1250 recapture
? Rental real estate
is always subject
to Sec,1250
recapture
Recapture Rules For
Nonresidential Real Estate
? Pre-ACRS is subject to Sec,
1250 recapture on all
depreciation taken in
excess of straight-line,
limited by realized gain
? ACRS nonresidential real
estate (acquired between 1-
1-1981 and 12-31-1986) is
subject to Sec,1245
recapture,unless straight-
line recovery was elected
Low Income Housing
? Qualified low-
income housing
may have less
Sec,1250
recapture than
other residential
rental property
Additional Recapture for
Corporations
? Additional recapture under Sec,291
? The additional amount Under Sec 291
is equal to 20% of the difference
between the amount that would be
recaptured if the property was Sec,
1245 property,
Recapture Provisions –
Other Applications
? Gifts of property subject to recapture
? Transfer of property subject to
recapture at death
? Charitable contributions
? Like-kind exchanges
? Involuntary conversions
Recapture Provisions
? Installment sales
? Section 179
? Conservation and land clearing
expenditures
? Intangible drilling costs and depletion
? Gain on sale of depreciable property
between related parties
Tax Planning
Considerations
? For non-corporate taxpayers,Sec,
1231 gains preferable to ordinary
income
? Corporate taxpayers after 1986,it
does not make a difference whether a
gain is classified as Sec,1231 gain or
ordinary income
Compliance And Procedural
Considerations
? Report Sec,1231
gains and losses
on Form 4797
? Report gains
recaptured on
ordinary income
on Form 4797
? Report casualty or
theft gain on Form
4684
