Trying to find a workable description of "unrecaptured section 1250 gain"...

Here's a simple description of "unrecaptured section 1250 gain" from a website of Financial Tax Information. It's supposed to help us understand how that kind of gain gets taxed.
The website says this: IRS expects you " pay back the taxes that you would have paid if you didn't depreciate that [depreciable] portion of the house. Section 1250 requires you to pay a flat 25 percent rate on these gains, instead of your regular income tax rate or the capital gains rate."
Is this statement correct? A simple "yes" or "no" answer will be just fine.
Later, the same online source says "Add your recaptured depreciation to your basis. The result is your adjusted basis for the rental house."
No comment should be necessary on that.
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No, but rather than start an argument by simply saying "no", my answer is "no" for the following reasons:
1. it ignores the possibility of depreciation recapture (depreciation taken in excess of straight line). Although over time, this is less and less likely to occur.
2. the 25% IS a capital gains tax rate.
3. the IRS doesn't really care if you actually depreciated the depreciable portion of an asset, only that depreciation SHOULD have been taken.
"no comment should be necessary on that". Oh, you don't know me AT ALL! :)
This sort of sounds right, yeah, I get the gist of it, but in reality it is what I refer to as "income tax law as explained by a plumber".
The adjusted basis is not changed due to unrecaptured 1250 gain or depreciation recapture. The gain is apportioned to three possible taxable values:
1. depreciation recapture, ordinary income 2. unrecaptured 1250 gain, 25% 3. honest to goodness LTCG, taxed at your LTCG rate.
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Taxed and Spent
After various searches, I have found an article in Forbes that explains 1231, 1245, and 1250 gains with examples. It starts with gains on 1231 assets and then tells you to hold on because those assets may be recharactierized as sec. 1245 or 1250. Then using an example where there is no 1250 gain (depreciation in excess of straight line), he tells you that Section 1(h)(1)(E) requires an additional step. That section requires you to pay the 25% capital gains rate on unrecaptured section 1250 gain. Unrecaptured Section 1250 gain is the amount of the depreciation taken on the property -- limited to the actual gain on the sale -- that is not recaptured as ordinary income under Section 1250. In the example the gain is greater than the depreciation for the real property. As such, the depreciation is unrecaptured 1250 gain and "may" be taxed at 25%. He then explains that Sec. 1 limits the amount of the unrecaptured gain subject to the 25% rate to the net capital gain. Quoting the author: This means that a taxpayer with Section 1250 property must first put the gain attributable to the property into the Section 1231 netting analysis to determine the total net capital gain, and then, if the net capital gain exceeds the amount of depreciation on the Section 1250 property treated as unrecaptured Section 1250 property, extract that portion and subject it to a 25% rate.
Read the article... it is enlightening.
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