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2. PROPERTY TRANSACTIONS: §1231 AND RECAPTURE (1 of 2)
History of §1231
Overview of basic tax treatment for §1231
§1231 property
Involuntary conversions
Procedure for §1231 treatment
Recapture provisions of §1245
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3. PROPERTY TRANSACTIONS: §1231 AND RECAPTURE (2 of 2)
Recapture provisions of §1250
Additional recapture for corporations
Recapture provisions—other applications
Tax planning considerations
Compliance and procedural considerations
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4. History of §1231 (1 of 2) 1930s, business assets were capital assets
Owners retained assets that declined in value so they could get ordinary deductions
§1231-like rules to allow ordinary losses
Prior to % of LTCG excluded
Remaining 40% taxed at ordinary rates
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5. History of §1231 (2 of 2) TRA 1986 eliminated 60% exclusion
Replaced with max 28% tax rate
JGTRRA 2003 reduced max rate to 15%
5% if in 10% or 15% bracket
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6. Overview of Basic Tax Treatment for §1231
Net gains
Net losses
Tax rate for net §1231 gain
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7. Net Gains §1231 gains netted against §1231 losses
Net Gains treated as LTCG
May be ordinary due to lookback rules
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8. Net Losses Treated as ordinary loss Five year Look-back rule
Any net §1231 gain ordinary to extent of any non recaptured net §1231 losses from previous five years
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9. Tax Rate for Net §1231 Gain Max rate 15%
5% if in 10% or 15% tax bracket
25% for unrecaptured §1250 property
28% for collectibles
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10. §1231 Property (1 of 2) §1231 property defined Non §1231 property
Real property or depreciable property used in a trade or business for > 1 year
Timber, coal, livestock, and land with unharvested crops
Non §1231 property
Musical composition, inventory, copyright, letters or memorandum
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11. §1231 Property (2 of 2)
Real or depreciable property used in a trade or business
If held for ≤ 1 year, not §1231 property and NOT a capital asset
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12. Involuntary Conversions (1 of 2)
Condemnations
Gains and losses from condemned §1231 property and non-personal condemned capital asset treated as §1231 gains and losses
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13. Involuntary Conversions (2 of 2)
Other involuntary conversions
Net gain from casualties and theft treated as §1231 gain
Net losses on §1231 property from casualties and theft treated as ordinary income
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14. Procedure for §1231 Treatment (1 of 2)
All non-personal casualty and theft gains and losses netted
If net loss, ordinary treatment
If net gain, amount included in regular §1231 netting
Net all §1231 gains and losses
Include net gain from 1
Sale or exchange of §1231 property
Condemnations of §1231 property
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15. Procedure for §1231 Treatment (2 of 2)
Treatment of net gain or loss from 2
If netting results in net gain, gain treated as LTCG
Consider 5-yr lookback rule
If netting results in net loss, treated as ordinary loss
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16. Recapture Provisions of §1245 (1 of 2)
Gain from disposition of §1245 property treated as ordinary to extent of depreciation taken
Purpose of §1245
To recapture ordinary deductions as ordinary income
§1245 is a characterization provision
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17. Recapture Provisions of §1245 (2 of 2)
§1245 property
Depreciable personal property
Not portion expensed under §179
§197 intangibles subject to amortization
Portion of real property expensed or amortized under special provisions
Nonresidential real estate depreciated under ACRS rules
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18. Recapture Provisions of §1250
Purpose of §1250
Convert a portion of gain on sale of certain depreciable real property into ordinary income when real property is sold or exchanged
Not applied to most real property placed into service after 1986
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19. Additional Recapture for Corporations
Additional recapture under §291
Additional amount of §291 recapture
20% of difference between amount that would be recaptured if the property was §1245 property and the actual recapture amount under §1250
Actual recapture amount under §1250 usually $0
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20. Recapture Provisions—Other Applications (1 of 5)
Gifts of property subject to recapture
Recapture potential transfers to donee
Transfer of property subject to recapture at death
No recapture
Recapture does not transfer to donee
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21. Recapture Provisions—Other Applications (2 of 5)
Charitable contributions
Contribution of LTCG property reduced by recapture amount
Like-kind exchanges
Gain recognized ordinary to extent of depreciation recapture
Remaining recapture carries over to replacement property
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22. Recapture Provisions—Other Applications (3 of 5)
Involuntary conversions
Gain recognized ordinary to extent of depreciation recapture
Installment sales
All gain subject to recapture recognized in year of sale
Excess gain reported under installment rules
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23. Recapture Provisions—Other Applications (4 of 5)
§179 expensing election
Portion recaptured if converted to nonbusiness use
Conservation and land clearing expenditures
Portion may be recaptured as ordinary income
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24. Recapture Provisions—Other Applications (5 of 5)
Intangible drilling costs and depletion
Part of gain may be ordinary due to recapture of IDCs
Gain on sale of depreciable property between related parties
All gain ordinary if property subject to depreciation in hands of transferee
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25. Tax Planning Considerations
For non-corporate taxpayers, §1231 gains preferable to ordinary income
Corporate taxpayers after 1986, it does not make a difference whether a gain is classified as §1231 gain or ordinary income
Avoiding the recapture provisions
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26. Compliance and Procedural Considerations
Report §1231 gains and losses on Form 4797
Report gains recaptured on ordinary income on Form 4797
Report casualty or theft gain on Form 4684
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27. ©2008 Prentice Hall, Inc.