Lesson 7 (Ch. 12)

Question 1

Section 1245 Property

Answer 1

Tangible personal property
Example: Machinery and Equipment

Gain = Ordinary Income to the extent of previously claimed depreciation. Any remainder gain = LTCG Rates (Section 1231)

Loss = Ordinary Loss (Section 1231)

Question 2

Section 1250 Property

Answer 2

Real Property (Business Real Estate)
Example: Buildings and Structures

Gain = Lesser of:
Recognized gain on asset
Accumulated depreciation on the asset (25% max rate)
Any remaining gain = LTCG Rates (Section 1231)

Question 3

What is the purpose of the depreciation recapture provision in the IRC?

Answer 3

Because in theory a taxpayer may have benefitted from depreciation of an asset above and beyond the actual decline in value of the asset.

Can’t benefit from a deduction to reduce ordinary income and benefit from LTCG rates on the gain on a sale.

Question 4

Steps to determining tax consequences of section 1231 assets

Answer 4

1. Categorize the asset (Section 1231)
2. Calculate the gain or loss (Amount Realized - Adjusted Basis)
3. Consider depreciation recapture (personal property 1245, real property 1250)
4. Apply best of both worlds rule (gains = LTCG, losses = ordinary income)

Question 5

Recapture rules for Gifts

Answer 5

Depreciation recapture potentnial carries over to donee

Question 6

What is the 5 year look back provision with Section 1231 gains?

Answer 6

Any current year Section 1231 gains will be treated as ordinary income to the extent there are an unrecaptured section 1231 losses in the previous 5 years. Any remaining gain treated as capital gain