Unrecaptured Section 1250 Gain

When a depreciable asset is sold, the depreciation that has been allowed or allowable may be subject to recapture. When depreciation is recaptured, some or all of the taxable gain from the sale is taxed at ordinary income tax rates instead of the more favorable capital gain rates.

For depreciable real estate, this recapture is called section 1250 recapture (Internal Revenue Code: Sec. 1250, Gain from dispositions of certain depreciable realty). For real estate, only the portion of depreciation in excess of straight-line depreciation is subject to recapture. Since straight-line is the method of depreciation currently used for real estate, this means that there is usually no recapture of depreciation when depreciable real estate is sold. The portion of the gain attributable to this non-recaptured depreciation is labeled “unrecaptured section 1250 gain” and is subjected to a higher *maximum* capital gain tax rate of 25%.

For (non-RIC) Subchapter C corporations, 20% of the unrecaptured section 1250 gain is recharacterized as ordinary income for AMT purposes only. §291(a) Although the ordinary and capital gain tax rates are the same for C corporations, the recharacterization may make a difference in a year with both capital gains and capital losses. The reduction to total capital gains by the recharacterization may cause the corporation to be in a net capital loss position.

Corporations cannot reduce current year taxable income by net capital losses. §1211(a) Corporations may carryback a capital loss for three years §1212(a)(1)(A) and carry it forward for five years. §1212(a)(1)(B).

“Unrecaptured section 1250 gain” is not income that is accelerated upon disposal in an installment sale.

There are three types of unrecaptured section 1250 gain.