Slide 1PROPERTY TRANSACTIONS: §1231 AND RECAPTURE (1 of 2)PROPERTY TRANSACTIONS: §1231 AND RECAPTURE (2 of 2)History of §1231 (1 of 2)History of §1231 (2 of 2)Overview of Basic Tax Treatment for §1231Net GainsNet LossesTax Rate for Net §1231 Gain§1231 Property (1 of 2)§1231 Property (2 of 2)Involuntary Conversions (1 of 2)Involuntary Conversions (2 of 2)Procedure for §1231 Treatment (1 of 2)Procedure for §1231 Treatment (2 of 2)Recapture Provisions of §1245 (1 of 2)Recapture Provisions of §1245 (2 of 2)Recapture Provisions of §1250Additional Recapture for CorporationsRecapture Provisions—Other Applications (1 of 5)Recapture Provisions—Other Applications (2 of 5)Recapture Provisions—Other Applications (3 of 5)Recapture Provisions—Other Applications (4 of 5)Recapture Provisions—Other Applications (5 of 5)Tax Planning ConsiderationsCompliance and Procedural ConsiderationsSlide 2713-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.13-2PROPERTY PROPERTY TRANSACTIONS: §1231 TRANSACTIONS: §1231 AND RECAPTUREAND RECAPTURE (1 of 2) (1 of 2)History of §1231Overview of basic tax treatment for §1231§1231 propertyInvoluntary conversionsProcedure for §1231 treatmentRecapture provisions of §1245©2007 Prentice Hall, Inc.13-3PROPERTY PROPERTY TRANSACTIONS: §1231 TRANSACTIONS: §1231 AND RECAPTUREAND RECAPTURE (2 of 2) (2 of 2)Recapture provisions of §1250Additional recapture for corporationsRecapture provisions—other applicationsTax planning considerationsCompliance and procedural considerations©2007 Prentice Hall, Inc.13-4History of §1231History of §1231(1 of 2)(1 of 2)In 1930s, business assets 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©2007 Prentice Hall, Inc.13-5History of §1231History of §1231(2 of 2)(2 of 2)TRA 1986 eliminated 60% exclusionReplaced with max 28% tax rateJGTRRA 2003 reduced max rate to 15%5% if in 10% or 15% bracket©2007 Prentice Hall, Inc.13-6Overview of Basic Tax Overview of Basic Tax Treatment for §1231Treatment for §1231Net gainsNet lossesTax rate for net §1231 gain©2007 Prentice Hall, Inc.13-7Net Gains§1231 gains netted against §1231 lossesNet Gains treated as LTCGMay be ordinary due to lookback rules©2007 Prentice Hall, Inc.13-8Net LossesTreated as ordinary lossFive year Look-back ruleAny net §1231 gain ordinary to extent of any non recaptured net §1231 losses from previous five years©2007 Prentice Hall, Inc.13-9Tax Rate for Net §1231 GainMax rate 15%5% if in 10% or 15% tax bracket25% for unrecaptured §1250 property28% for collectibles©2007 Prentice Hall, Inc.13-10§1231 Property§1231 Property(1 of 2)(1 of 2)§1231 property definedReal property or depreciable property used in a trade or business for > 1 yearTimber, coal, livestock, and land with unharvested cropsNon §1231 propertyMusical composition, inventory, copyright, letters or memorandum©2007 Prentice Hall, Inc.13-11§1231 Property§1231 Property(2 of 2)(2 of 2)Real or depreciable property used in a trade or businessIf held for ≤ 1 year, not §1231 property and NOT a capital asset©2007 Prentice Hall, Inc.13-12Involuntary ConversionsInvoluntary Conversions(1 of 2)(1 of 2)CondemnationsGains and losses from condemned §1231 property and non-personal condemned capital asset treated as §1231 gains and losses©2007 Prentice Hall, Inc.13-13Involuntary ConversionsInvoluntary Conversions(2 of 2)(2 of 2)Other involuntary conversionsNet gain from casualties and theft treated as §1231 gainNet losses on §1231 property from casualties and theft treated as ordinary income©2007 Prentice Hall, Inc.13-14Procedure for §1231 Procedure for §1231 TreatmentTreatment(1 of 2)(1 of 2)1. All non-personal casualty and theft gains and losses nettedIf net loss, ordinary treatmentIf net gain, amount included in regular §1231 netting2. Net §1231 gains and losses fromInclude net gain from 1Sale or exchange of §1231 propertyCondemnations of §1231 property©2007 Prentice Hall, Inc.13-15Procedure for §1231 Procedure for §1231 TreatmentTreatment(2 of 2)(2 of 2)3. Treatment of net gain or loss from 2If netting results in net gain, gain treated as LTCG If netting results in net loss, treated as ordinary loss©2007 Prentice Hall, Inc.13-16Recapture Provisions of Recapture Provisions of §1245§1245(1 of 2)(1 of 2)Gain from disposition of §1245 property treated as ordinary to extent of depreciation takenPurpose of §1245To recapture ordinary deductions as ordinary income§1245 is a characterization provision©2007 Prentice Hall, Inc.13-17Recapture Provisions of Recapture Provisions of §1245§1245(2 of 2)(2 of 2)§1245 propertyDepreciable personal propertyNot portion expensed under §179Intangibles subject to amortization under §197Portion of real property expensed or amortized under special provisionsNonresidential real estate depreciated under ACRS rules©2007 Prentice Hall, Inc.13-18Recapture Provisions of Recapture Provisions of §1250§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 exchangedDoes not apply to most real property placed into service after 1986©2007 Prentice Hall, Inc.13-19Additional Recapture for Additional Recapture for CorporationsCorporationsAdditional recapture under §291Additional amount of §291 recapture20% of difference between amount that would be recaptured if the property was §1245 property and the actual recapture amount under §1250Actual recapture amount under §1250 usually $0©2007 Prentice Hall, Inc.13-20Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (1 of 5) (1 of 5)Gifts of property subject to recaptureRecapture potential transfers to doneeTransfer of property subject to recapture at deathNo recaptureRecapture does not transfer to donee©2007 Prentice Hall, Inc.13-21Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (2 of 5) (2 of 5)Charitable contributionsContribution of LTCG property reduced by recapture amountLike-kind exchangesGain recognized ordinary to extent of