Question

1) What is IRC section 751 recapture and how is it taxed? is it ordinary or capital?

2) How does it impact your gain on the sale of an appreciated asset?

Answer 1

1) Section 751 provides that the fair market value of any property (or amount of any money), received by a selling partner in exchange for part or all of his interest in the partnership which is attributable to:

-- unrealized receivables of the partnership,

-- substantially appreciated items of inventory in the partnership, or

-- ordinary depreciation in income recapture under Sections 1245 or 1250

is categorised as an amount realized from the exchange or sale of property other than a capital asset, thus, it is ordinary.

　

2) When a partner sells his interest in partnership, the share of any gain attributable to cash-basis accounts receivables, appreciated inventory, or depreciation recapture will lead to an in ordinary income instead of capital gain

Under Section 751, the regulations provide that once the ordinary income or loss component is determined, then the amount (i.e.. ordinary gain / loss) has to be subtracted from the total gain/ loss and the balancing gain or loss is a capital gain or loss.