What is Section 1250 Real Property?

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
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
In article ,
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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