13-1 ©2009 pearson education, inc. publishing as prentice hall
TRANSCRIPT
13-1©2009 Pearson Education, Inc. Publishing as Prentice Hall
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PROPERTY PROPERTY TRANSACTIONS: §1231 TRANSACTIONS: §1231 AND RECAPTUREAND RECAPTURE (1 of 2) (1 of 2)
History of §1231Overview of basic tax treatment
for §1231§1231 propertyInvoluntary conversionsProcedure for §1231 treatmentRecapture provisions of §1245
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PROPERTY PROPERTY TRANSACTIONS: §1231 TRANSACTIONS: §1231 AND RECAPTUREAND RECAPTURE (2 of 2) (2 of 2)
Recapture provisions of §1250Additional recapture for corporationsRecapture provisions—other
applicationsTax planning considerationsCompliance and procedural
considerations
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History of §1231History of §1231(1 of 2)(1 of 2)
1930s, business assets were capital assets Owners retained assets that declined in value
so they could get ordinary deductions§1231-like rules to allow ordinary lossesPrior to 1987, 60% of LTCG excluded
Remaining 40% taxed at ordinary rates
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History of §1231History of §1231(2 of 2)(2 of 2)
TRA 1986 eliminated 60% exclusionReplaced with max 28% tax rate
JGTRRA 2003 reduced max rate to 15%5% if in 10% or 15% bracket
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Overview of Basic Tax Overview of Basic Tax Treatment for §1231Treatment for §1231
Net gainsNet lossesTax rate for net §1231 gain
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Net Gains
§1231 gains netted against §1231 losses
Net Gains treated as LTCGMay be ordinary due to look-back
rules
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Net Losses
Treated as ordinary loss5-year look-back rule
Any net §1231 gain ordinary to extent of any non-recaptured net §1231 losses from previous 5 years
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Tax Rate for Net §1231 Gain
Max rate 15%0% if in 10% or 15% tax bracket
Tax rate on unrecaptured §1250 property is 25%
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§1231 Property§1231 Property(1 of 2)(1 of 2)
§1231 property definedReal property or depreciable property
used in a trade or business for > 1 yearTimber, coal, livestock, and land with
unharvested cropsNon §1231 property
Musical composition, inventory, copyright, letters or memorandum
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§1231 Property§1231 Property(2 of 2)(2 of 2)
Real or depreciable property used in a trade or businessIf held for ≤ 1 year, not §1231
property and NOT a capital asset
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Involuntary ConversionsInvoluntary Conversions(1 of 2)(1 of 2)
CondemnationsGains and losses from condemned
§1231 property and non-personal condemned capital asset treated as §1231 gains and losses
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Involuntary ConversionsInvoluntary Conversions(2 of 2)(2 of 2)
Other involuntary conversionsNet gain from casualties and theft
treated as §1231 gainNet losses on §1231 property from
casualties and theft treated as ordinary income
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Procedure for §1231 Procedure for §1231 TreatmentTreatment (1 of 2) (1 of 2)
1. All non-personal casualty and theft gains and losses netted
If net loss, ordinary treatment If net gain, amount included in regular
§1231 netting2. Net all §1231 gains and losses
Include net gain from 1 Sale or exchange of §1231 property Condemnations of §1231 property
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Procedure for §1231 Procedure for §1231 TreatmentTreatment (2 of 2) (2 of 2)
3. Treatment of net gain or loss from 2
If netting results in net gain, gain treated as LTCG
Consider 5-yr look-back rule If netting results in net loss,
treated as ordinary loss
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Recapture Provisions of Recapture Provisions of §1245§1245
(1 of 2)(1 of 2)
Gain from disposition of §1245 property treated as ordinary to extent of depreciation taken
Purpose of §1245To recapture ordinary deductions as
ordinary income§1245 is a characterization provision
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Recapture Provisions of Recapture Provisions of §1245§1245
(2 of 2)(2 of 2)
§1245 propertyDepreciable personal property
Not portion expensed under §179§197 intangibles subject to
amortizationPortion of real property expensed or
amortized under special provisionsNonresidential real estate depreciated
under ACRS rules
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Recapture Provisions of Recapture Provisions of §1250§1250
Purpose of §1250Convert a portion of gain on sale of
certain depreciable real property into ordinary income when real property is sold or exchanged
Not applied to most real property placed into service after 1986
Unrecaptured §1250 gain taxed at 25%
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Additional Recapture for Additional Recapture for CorporationsCorporations
Additional recapture under §291Additional amount of §291 recapture
20% of difference between amount that would be recaptured if the property was §1245 property and the actual recapture amount under §1250
Actual recapture amount under §1250 usually $0
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Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (1 of 5) (1 of 5)
Gifts of property subject to recaptureRecapture potential transfers to donee
Transfer of property subject to recapture at deathNo recaptureRecapture does not transfer to donee
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Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (2 of 5) (2 of 5)
Charitable contributionsContribution of LTCG property
reduced by recapture amountLike-kind exchanges
Gain recognized ordinary to extent of depreciation recapture
Remaining recapture carries over to replacement property
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Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (3 of 5) (3 of 5)
Involuntary conversionsGain recognized ordinary to extent of
depreciation recaptureInstallment sales
All gain subject to recapture recognized in year of sale
Excess gain reported under installment rules
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Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (4 of 5) (4 of 5)
§179 expensing electionPortion recaptured if converted to
nonbusiness useConservation and land clearing
expendituresPortion may be recaptured as
ordinary income
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Recapture Provisions—Recapture Provisions—Other ApplicationsOther Applications (5 of 5) (5 of 5)
Intangible drilling costs and depletionPart of gain may be ordinary due to
recapture of IDCsGain on sale of depreciable property
between related partiesAll gain ordinary if property subject to
depreciation in hands of transferee
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Tax Planning Tax Planning ConsiderationsConsiderations
For non-corporate taxpayers, §1231 gains preferable to ordinary income
Corporate taxpayers after 1986, tax rates on ordinary income and §1231 gains the sameHowever, net §1231 gain can be used
to offset capital lossesAvoiding the recapture provisions
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Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations
Report §1231 gains and losses on Form 4797
Report gains recaptured on ordinary income on Form 4797
Report casualty or theft gain on Form 4684
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