Question

Harold Hunch purchased Section 1250 commercial property on January 1, 1980, and sold it on January 1, 2019, at a gain of $250,000. Depreciation taken was $500,000; straight-line depreciation would have been $400,000.

1. How should Harold treat the gain or loss?
2. What would your answer have been in (a) if the property had been residential rental housing?

Answer 1

When a section 1250 property is sold,

• Gain on sale of property to the extent of depreciation taken over the starightline depreciation shall be treated as ordinary gain.
• The remaining straight line depreciation shall be taxed at the maximum rate of 25%.
• Any amount remaining thereafter would be treated as Sec 1231 gain

In the given question,

Total gain = $250,000

Depreciation taken over the straight line depreciation = $500,000 - $400,000 = $100,000

thus $100,000 shall be treated as ordinary gain.

The remaining gain of $150,000 shall be unrecaptured Sec 1250 gain taxable at the rate 25%

Required b.

Section 1250 assets are those assets which are real property used in the trade or business.

Thus residential rental housing does not qualify for Sec 1250 asset.

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