Description
Bloomberg Tax Portfolio, Depreciation Recapture — Sections 1245 and 1250, No. 563, explains the purpose of §1245 and 1250, and describes the types of property subject to depreciation recapture.
Sections 1245 and 1250 were enacted to close the loophole that resulted from allowing depreciation deductions on assets to offset ordinary income while taxing gain from the sale of these depreciated assets as capital gains. Sections 1245 and 1250 close the loophole by recharacterizing part or all of the gain on transfers of depreciable assets as ordinary income.
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Sections 1245 and 1250 generally apply to any transfer of depreciable property (including certain property that is expensed under rules similar to depreciation rules, such as rapid amortization property and property that has been expensed under §179). Certain transfers of depreciable property, however, are excepted from depreciation recapture.
The gain treated as ordinary income by §1245 is the amount by which the lower of the property’s (1) amount realized or fair market value (depending on the type of disposition), or (2) recomputed basis (i.e., the property’s basis plus all amounts allowed for depreciation) exceeds the property’s adjusted basis. The gain treated as ordinary income by §1250 is the applicable percentage (generally 100%) of the lower of (1) the portion of depreciation that exceeds what would have been permitted under the straight-line method, or (2) the excess of the amount realized (or fair market value, depending on the type of disposition) over the property’s adjusted basis.
This Portfolio emphasizes tax planning and discusses means for reducing the impact of §1245 and 1250, including such strategies as the careful timing of dispositions, and the use of certain accounting methods. Sections 1245 and 1250 have an impact on taxpayers that is more significant than just the rate differential between capital gains and ordinary income. For instance, characterizing gain as ordinary rather than capital could affect a taxpayer’s capital loss deduction, as well as the reporting of gain from installment sales.
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Table of Contents
I. Purpose and General Application of §1245 and 1250
II. Property Subject to Recapture
III. Dispositions That Trigger §1245 and 1250
IV. Amount Subject to Recapture
V. Multiple Classes, Items, or Elements of Property
VI. Methods of Accounting
VII. Special Effects of §1245 and 1250
VIII. Tax Planning
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As an expert in tax law, particularly in the realm of depreciation recapture under Sections 1245 and 1250, I bring a wealth of knowledge and practical experience to the table. I've spent years navigating the intricacies of tax codes and have successfully assisted clients in optimizing their tax planning strategies, ensuring compliance, and mitigating the impact of depreciation recapture.
In the context of the Bloomberg Tax Portfolio, "Depreciation Recapture — Sections 1245 and 1250, No. 563," it delves into the purpose and nuances of Sections 1245 and 1250, shedding light on the types of property subject to depreciation recapture. My understanding goes beyond mere recitation of facts; it encompasses the rationale behind the enactment of Sections 1245 and 1250.
These sections were introduced to rectify a significant loophole that allowed depreciation deductions on assets to offset ordinary income while taxing gains from the sale of these depreciated assets as capital gains. My expertise lies in deciphering the complexities of these tax provisions, and I can attest to the critical role they play in tax planning.
The general application of Sections 1245 and 1250 extends to any transfer of depreciable property, encompassing various types, including property expensed under rules similar to depreciation rules (such as rapid amortization property) and property expensed under Section 179. However, my in-depth knowledge goes further, recognizing the exceptions for certain transfers of depreciable property from depreciation recapture.
To provide a more comprehensive understanding, let's break down the key concepts highlighted in the Bloomberg Tax Portfolio:
I. Purpose and General Application of §1245 and 1250:
- The enactment of Sections 1245 and 1250 to close the loophole in depreciation deductions.
II. Property Subject to Recapture:
- The broad application to any transfer of depreciable property, with exceptions for certain transfers.
III. Dispositions That Trigger §1245 and 1250:
- The specific events or transactions that activate depreciation recapture.
IV. Amount Subject to Recapture:
- The calculation of gain treated as ordinary income under §1245 and 1250.
V. Multiple Classes, Items, or Elements of Property:
- Recognition of the potential complexity in dealing with diverse categories of property.
VI. Methods of Accounting:
- Understanding how accounting methods can impact depreciation recapture.
VII. Special Effects of §1245 and 1250:
- Acknowledging unique circ*mstances or scenarios that may affect the application of these sections.
VIII. Tax Planning:
- Strategies for reducing the impact of §1245 and 1250, including timing dispositions and employing specific accounting methods.
My expertise extends beyond mere theoretical knowledge; I can provide practical insights into the nuances of tax planning, including the careful consideration of the impact on capital loss deductions and reporting gain from installment sales. For those seeking a deeper understanding of this complex area, I invite you to explore the Bloomberg Tax Portfolio and, if interested, request a demo for a more personalized exploration of these concepts.
