[SOLVED] What is Section 1250 Real Property? (2023 Update)

My father has some real estate he would like to sell. I'm trying to estimate the capital gains taxes. From what I've read, the tax rate depends on whether the real estate is Section 1250 real property. What is that?

I tried to find the answer on the IRS website. What it says, specifically, is that an exception to the standard 15% capital gains tax rate applies to "Section 1250 real property that is required to be recaptured in excess of straight-line depreciation". When I try to look up "Section 1250 real property", I find that it is defined as "all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property". That is a very confusing definition, and I have no idea whether my father's property falls into the category. Can anyone provide a simpler explanation that might help?

Also, from what I understand, the 15% capital gains rate is scheduled to increase to 20% in 2011. Will there be a similar increase in the

25% tax rate for Section 1250 property?

-TC

========================================= MODERATOR'S COMMENT: That's not a bad definition at all. If you sell a home with a refrigerator in it, the fridge is section 1245 property. The land is Section 1231 property and land is not depreciable. The building itself and all attached structures such as a deck would be 1250 property. Assume for your case here that Structures = Section 1250 property. But that may not solve your problem. You might be trying to figure out where to calculate and list the Unrecaptured Section 1250 Gain, and now have to deal with an entirely more complicated topic! I'll leave this for others to answer.

Reply to
TC
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Section 1250 property refers to real property that is used in a trade or business and is subject to depreciation. This includes buildings and other structures that are used to generate income. When this type of property is sold, the difference between the selling price and the depreciated value is subject to a special 25% capital gains tax rate, known as the Section 1250 recapture rate. This rate is designed to recapture any depreciation previously taken on the property.

It's important to note that for this category of property, the 25% rate only applies to the portion of the gain that exceeds the straight-line depreciation. The portion of the gain that is equal to or less than the straight-line depreciation is taxed at the standard long-term capital gains rate, which is currently 20% for individuals.

To determine if your father's property falls under Section 1250 property, you will need to consult with a tax professional. It's important to review the property usage and depreciation records, as well as any past tax returns filed for the property to make a proper assessment. When property is owned jointly by multiple individuals, the tax treatment of the property can be affected. The way the property is titled, and the percentage of ownership for each individual, can determine how the capital gains tax is calculated and applied. When it comes to Section 1250 property, if the property is owned jointly, the capital gains tax is calculated based on each individual's percentage of ownership. For example, if your parents jointly own the property 50-50, and they decide to sell the property, they will each be subject to the Section 1250 recapture rate on half of the gain. It's important to note that joint ownership can also affect the calculation of the basis of the property. The basis is the original cost of the property, plus any improvements, minus any depreciation taken. When property is owned jointly, the basis is allocated among the owners in proportion to their respective ownership interests. This can have an impact on the amount of gain and therefore the amount of taxes due when the property is sold. It's important to consult with a tax professional to determine the specific tax treatment of the property based on the ownership structure and the usage of the property. They can help you understand the tax implications of the sale and help you make an informed decision

In terms of updates, the tax law related to Section 1250 property has not changed to the best of my knowledge, but it's always a good idea to consult a tax professional to confirm the most recent tax laws as they are subject to change

Reply to
Smart Bean

Did he use the real estate for business activities, such as running a home office, warehouse storage, renting at any point in time? If yes, was the entire property used for that purpose? Did he also use the property for personal reasons -- ie. living there sometimes? Did he use the property for neither personal nor business reasons -- ie. just property held for investment? And if so, did he file a document with the IRS claiming that he is making an IRC 266 election?

If I'm not mistaken, the 25% rate was never reduced in the Bush tax cut, so it should not go up.

What is the difference between 1231, 1245, 1250 for taxes?

Regarding the fridge example above, how does one handle that for tax purposes? Say one buys a house for 500k and sometime later sells the fridge for $200. Estimate the value of the fridge when the house was purchased as $300. I would think that the cost basis of the house is

500k-200I9700, and the sale of the fridge has a loss of $100, but is not deductible if the fridge was used for personal use. On the other hand, the person who sold you the house for 500k may have paid capital gain taxes on the fridge. Say they bought the house for 200k and get a 250k exclusion, so their profit is 500k-250k-200kPk. Do they get to subtract out the cost of the fridge from their profits? Because they might have paid 1k for the fridge, so their checking account has decreased by 1k. But the fridge adds 1k to the value of the house, so when they sell the house they're again paying capital gains on the fridge.
Reply to
removeps-groups

IRC §1250 property is generally defined as improved commercial real estate and is real property subject to a depreciation deduction on the taxpayer?s return.

Milt Baker CPA

Reply to
cpabakem01

Gross generalization, but 1231 is generally long or short term capital gains subject to a maximum 15% LT rate, 1245 is ordinary income, and unrecaptured 1250 is long term gain subject to a maximum 25% rate.

If going on a 4797, there are different sections of that form for each type of property.

Allocation.

Four-syllable word but sometimes the only way to get things done.

Yes, it can mean allocating a tiny portion of the overall sales price of the building to the fridge, or can even mean allocaing this amount in the sales contract itself! (I actually saw this done once.)

And if the sales price allocated to the 1245 property exactly equals the undepreciated basis of that property, which is not unreasonable, the gain/loss works out to be zero. Which makes the numbers work nicely.

Reply to
Arthur Kamlet

What may be a lot more important than the code section is the possibility that the real estate may have been jointly owned by both your parents in the past. Did you father inherit your mothers portion? Perhaps there is a step up in basis that should be considered.

Reply to
Haskel LaPort

Thank you for the replies. From your comments, I now believe there is a significant possibility that the property is Section 1250 property, so I'll consult with an accountant before making any decision.

I was surprised to hear that one important factor is whether the property was owned jointly. It is owned jointly by my parents, and always has been. How does that affect the taxes?

-TC

Reply to
TC

Your post said my father is selling but now you say it is jointly owned, can we assume you mother is alive before going off on a tangent?

Reply to
Haskel LaPort

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