Question

What is the purpose of section 1245 and 1250? Explain rather than describe them.

Answer 1

Section 1245 and section 1250 tell us about recharacterizing part or all of the gains from sale of depreciable asset as ordinary income. These sections apply to all transfer or sale of depreciable asset. Section 1250 is defined as depreciable real property other than considered in section 1245.

Section 1245 includes all the depreciable whether tangible or intangible and certain depreciable real property. If we sell property under this section than the the gain upto the extend of depreciation claim in earlier years would be considered as ordinary income and if the gain exceeds the depreciation which is previously taken than the tax on it would be considered as per section 1231 which related to capital gain. This sections recapture rule does not apply if the asset is sold at a loss. The loss treatment would be as per section 1231.

If Section 1250 property are sold than there would be two terms recapture depreciation and unrecaptured section 1250 gain. If the property is used after 1986 than none of the recapture depreciation would be included for long term capital gain. If non residential real property was placed before 1987 and the same was depreciated using the straight line method there would be no Section 1250 depreciation recapture. However if accelerated depreciation method was used the gain on sale to the extend of acceleration depreciation exceeded the straight line method of depreciation it will be considered as ordinary income. Any balance gain which exceeds the ordinary income because of this section but which is not exceeding the total depreciation claimed would be considered as unrecaptured section 1250 gain. This gain is taxable at minimum rate of 25%. Any remaining gain after considering the capture and recaptured gain of section 1250 would be treated as per section 1231.