1. Chapter 13 Property Transactions: Section 1231 and Recapture

2. 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

3. 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 non recaptured net Sec. 1231 losses from previous five years. Tax rate for Sec.1231 gain could be 15% or 5%

4. 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

5. Section 1231 Defined Congress extended Sec. 1231 treatment to transactions involving: –Timber –Coal –Livestock –Land with unharvested crops

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. Low Income Housing Qualified low- income housing may have less Sec. 1250 recapture than other residential rental property

15. 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.

16. 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

17. 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

18. 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 Avoiding the Recapture provisions

19. 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