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Subject Author Date
What is Section 1250 Real Property? TC 05-20-2008
Posted by TC on May 20, 2008, 5:15 pm
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 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.

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Posted by removeps-groups@yahoo.com on May 20, 2008, 6:28 pm
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> 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?

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?

> 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?

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


> ========================================= 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.

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-200=499700, 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-200k=50k. 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.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Arthur Kamlet on May 20, 2008, 8:28 pm
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>
>What is the difference between 1231, 1245, 1250 for taxes?

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.


>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-200=499700, 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-200k=50k. 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.


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.
--


ArtKamlet at a o l dot c o m Columbus OH K2PZH

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by cpabakem01 on May 20, 2008, 6:49 pm
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> 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.

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

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Haskel LaPort on May 21, 2008, 1:21 pm
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> 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.


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.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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