Chapter 12 agls 437

The Catch: Depreciation Recapture IF section 1231 applies, you must check to see if depreciation taken will have to be recaptured Why depreciation recapture? Depreciation is a form of capital recovery ideally, depreciation = actual economic decline in value of asset for tax purposes, depreciation follows a set schedule, regardless of actual decline in value when an asset is sold depreciation is recaptured FIRST, to represent the excess of depreciation taken greater than the actual economic decline if any then section 1231 applies Types of Section 1231 property Section 1245 property tangible personal property example: machinery and equipment Section 1250 property real property example: building and structures Taxation and section 1245 depreciation is recaptured (as ordinary income) to the extent of any given all depreciation must be recaptured before capital gains treatment under 1231 applies 4 possible outcomes Lecture 12 1
Tax consequences section 1245 asset Taxation and section 1250 depreciation taken > straight line depreciation is recaptured (at ordinary rates) unrecaptured section 1250 depreciation aka: straight line depreciation taxed at a flat 25% rate ( or marginal rate, if lower) Excess gain is capital gain under section 1231 EXAMPLE Less purchased an office building for $1,000,000. He has taken depreciation deductions of $300,00 (straight line depreciation would have been $200,00) at the time that he sold the building for $1,500,00 Lecture 12 2
Steps to determining tax consequences of section 1231 assets 1. categorize the asset (section 1231) 2. calculate gain or loss 3. consider depreciation recapture a. if personal property - section 1245 b. if real property - section 1250 4. apply best of both worlds rule Recapture rules and tax planning gifts depreciation recapture potential carries over to donee Non-taxable exchanges depreciation recapture carries over to the replacement property testamentary transfers section 1014 "step-up" extinguishes recapture potential charitable contributions if deductions is normally valued at FMV, must reduce deduction by amount of potential depreciation recapture Installment sales including SCINs and private annuities installment reporting provisions do not apply to depreciation recapture recapture occurs when gain is realized unrecaptured section 1250 depreciation may be deferred, but all of gain in each installment year will be taxed at 25% until all straights line depreciation is recaptured 5 year look back rule section 1231 netting process gains and losses for the year are netted tax planning Lecture 12 3
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