1. 13-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

2. 13-2 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

3. 13-3 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

4. 13-4 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 1987, 60% of LTCG excluded  Remaining 40% taxed at ordinary rates ©2009 Pearson Education, Inc. Publishing as Prentice Hall

5. 13-5 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

6. 13-6 Overview of Basic Tax Treatment for §1231  Net gains  Net losses  Tax rate for net §1231 gain ©2009 Pearson Education, Inc. Publishing as Prentice Hall

7. 13-7 Net Gains  §1231 gains netted against §1231 losses  Net Gains treated as LTCG  May be ordinary due to look-back rules ©2009 Pearson Education, Inc. Publishing as Prentice Hall

8. 13-8 Net Losses  Treated as ordinary loss  5-year look-back rule  Any net §1231 gain ordinary to extent of any non-recaptured net §1231 losses from previous 5 years ©2009 Pearson Education, Inc. Publishing as Prentice Hall

9. 13-9 Tax Rate for Net §1231 Gain  Max rate 15%  0% if in 10% or 15% tax bracket  Tax rate on unrecaptured §1250 property is 25% ©2009 Pearson Education, Inc. Publishing as Prentice Hall

10. 13-10 §1231 Property (1 of 2)  §1231 property defined  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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

11. 13-11 §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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

12. 13-12 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

13. 13-13 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

14. 13-14 Procedure for §1231 Treatment (1 of 2) 1. All non-personal casualty and theft gains and losses netted  If net loss, ordinary treatment  If net gain, amount included in regular §1231 netting 2. Net all §1231 gains and losses  Include net gain from 1  Sale or exchange of §1231 property  Condemnations of §1231 property ©2009 Pearson Education, Inc. Publishing as Prentice Hall

15. 13-15 Procedure for §1231 Treatment (2 of 2) 3. Treatment of net gain or loss from 2  If netting results in net gain, gain treated as LTCG  Consider 5-yr look-back rule  If netting results in net loss, treated as ordinary loss ©2009 Pearson Education, Inc. Publishing as Prentice Hall

16. 13-16 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

17. 13-17 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

18. 13-18 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  Unrecaptured §1250 gain taxed at 25% ©2009 Pearson Education, Inc. Publishing as Prentice Hall

19. 13-19 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

20. 13-20 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

21. 13-21 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

22. 13-22 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

23. 13-23 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

24. 13-24 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

25. 13-25 Tax Planning Considerations  For non-corporate taxpayers, §1231 gains preferable to ordinary income  Corporate taxpayers after 1986, tax rates on ordinary income and §1231 gains the same  However, net §1231 gain can be used to offset capital losses  Avoiding the recapture provisions ©2009 Pearson Education, Inc. Publishing as Prentice Hall

26. 13-26 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 ©2009 Pearson Education, Inc. Publishing as Prentice Hall

27. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 13-27 ©2009 Pearson Education, Inc. Publishing as Prentice Hall