Property Tax: Depreciation Recapture

Question 1

What are the 3 types of depreciation recaptures?

Answer 1

1245 (Personal property), 1250 (Real Property), and 291 (Real property)

Question 2

Describe Tax treatment for 1245 property:

Answer 2

Applies to property with MACRS recovery periods of 3, 5, or 7 years (software, equipment, FF)

1231 gains are normally taxed at special rates, however if 1231 property requires 1245 recapture, then gains to the extent of prior depreciation are reported as ordinary income.

Question 3

Describe Tax treatment for 1250 property:

Answer 3

Applies to any depreciable real property

The amount of the gain, up to additional depreciation, is treated as an ordinary gain (same concept as 1245 recapture)

Any gain, up to SL depreciation (Total depreciation - Additional depreciation = SL depreciation) is considered unrecaptured 1250 gain, taxed as LTCG at 25%

Any remaining gain is taxed at special rates (0,15,20)

Question 4

For 1250 property, what is “additional depreciation”? (Holding period)

Answer 4

Additional depreciation depends on the holding period of the asset:

< 1 year, additional depreciation = all depreciation

> 1 year, additional depreciation = excess of depreciation over the amount that would have been taken under straight-line

Question 5

What is the Section 1202 exclusion?

Answer 5

A non-corporate shareholder who holds qualified small business stock for at least 5 years is eligible to exclude 100% of the gain on sale of the stock

Question 6

What is the limit for the 1202 exclusion?

Answer 6

it is limited to the greater of:

10 times the basis of the stock

or

10,000,000 - any previous exclusions claimed on that stock