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
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©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
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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
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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