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©2011 Pearson ©2011 Pearson

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©2011 Pearson - PPT Presentation

Education Inc Publishing as Prentice Hall PROPERTY TRANSACTIONS 1231 AND RECAPTURE 1 of 2 History of 1231 Overview of basic tax treatment for 1231 1231 property Involuntary conversions ID: 381615

2011 1231 education pearson 1231 2011 pearson education publishing prentice hall property recapture ordinary gain net gains treated losses

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Presentation Transcript

Slide1

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide2

PROPERTY TRANSACTIONS: §1231 AND RECAPTURE

(1 of 2)

History of §1231Overview of basic tax treatment for §1231§1231 propertyInvoluntary conversionsProcedure for §1231 treatmentRecapture provisions of §1245

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide3

PROPERTY TRANSACTIONS: §1231 AND RECAPTURE

(2 of 2)

Recapture provisions of §1250Additional recapture for corporationsRecapture provisions—other applicationsTax planning considerationsCompliance and procedural considerations

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide4

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide5

History of §1231

(2 of 2)

TRA 1986 eliminated 60% exclusionReplaced with max 28% tax rate

TRA 1997 reduced max rate to 20%

JGTRRA 2003 reduced max rate to 15%

5% if in 10% or 15% bracket

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide6

Overview of Basic

Tax Treatment

for §1231Net gainsNet lossesTax rate for net §1231 gain

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide7

Net Gains

§1231 gains netted against §1231 losses

Net Gains treated as LTCGMay be ordinary due to lookback rules

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide8

Net Losses

Treated as ordinary loss

Five year Look-back ruleAny net §1231 gain ordinary to extent of any non recaptured net §1231 losses from previous five years

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide9

Tax Rate for Net §1231 Gain

Max rate 15%

0% if in 10% or 15% tax bracketTax rate on unrecaptured §1250

property is 25%

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide10

§1231 Property

(1 of 2)

§1231 property definedReal property or depreciable property used in a trade or business for > 1 yearTimber, coal, livestock, and land with unharvested cropsNon §1231 propertyMusical composition, inventory, copyright, letters or memorandum

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide11

§1231 Property

(2 of 2)

Real or depreciable property used in a trade or businessIf held for ≤ 1 year, not §1231 property and NOT a capital asset

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide12

Involuntary Conversions

(1 of 2)

CondemnationsGains and losses from condemned §1231 property and non-personal condemned capital asset treated as §1231 gains and losses

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide13

Involuntary Conversions

(2 of 2)

Other involuntary conversionsNet gain from casualties and theft treated as §1231 gainNet losses on §1231 property from casualties and theft treated as ordinary income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide14

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide15

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide16

Recapture Provisions of §1245

(1 of 2)

Gain from disposition of §1245 property treated as ordinary to extent of depreciation takenPurpose of §1245To recapture ordinary deductions as ordinary income§1245 is a characterization provision

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide17

Recapture Provisions of §1245

(2 of 2)

§1245 propertyDepreciable personal propertyNot 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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide18

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 exchangedNot applied to most real property placed into service after 1986Unrecaptured

§1250 gain taxed at 25%

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide19

Additional Recapture for Corporations

Additional recapture under §291

Additional amount of §291 recapture20% of difference between amount that would be recaptured if the property was §1245 property and the actual recapture amount under §1250Actual recapture amount under §1250 usually $0

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide20

Recapture Provisions—Other Applications

(1 of 5)

Gifts of property subject to recaptureRecapture potential transfers to doneeTransfer of property subject to recapture at death

No recapture

Recapture does not transfer to

donee

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide21

Recapture Provisions—Other Applications

(2 of 5)

Charitable contributionsContribution of LTCG property reduced by recapture amountLike-kind exchangesGain recognized ordinary to extent of depreciation recaptureRemaining recapture carries over to replacement property

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide22

Recapture Provisions—Other Applications

(3 of 5)

Involuntary conversionsGain recognized ordinary to extent of depreciation recaptureInstallment salesAll gain subject to recapture recognized in year of sale

Excess gain reported under installment rules

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide23

Recapture Provisions—Other Applications

(4 of 5)

§179 expensing electionPortion recaptured if converted to nonbusiness useConservation and land clearing expendituresPortion may be recaptured as ordinary income

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide24

Recapture Provisions—Other Applications

(5 of 5)

Intangible drilling costs and depletionPart of gain may be ordinary due to recapture of IDCsGain on sale of depreciable property between related partiesAll gain ordinary if property subject to depreciation in hands of transferee

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide25

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide26

Compliance and Procedural Considerations

Report §1231 gains and losses on Form 4797

Report gains recaptured on ordinary income on Form 4797Report casualty or theft gain on Form 4684

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide27

©2011 Pearson

Education, Inc. Publishing as Prentice Hall