how unrecaptured section 1250 gains work
section 1231 assets include all depreciable capital assets held by a taxpayer for longer than one year section 1231 is the umbrella for assets belonging to section 1245 and section 1250 and the latter is what determines the tax rate of depreciation recapture section 1250 relates only to real property such as buildings and land personal property such as machinery and equipment is subject to depreciation recapture as ordinary income under section 1245 3unrecaptured section 1250 gains are only realized when there is a net section 1231 gain in essence capital losses on all depreciable assets offset unrecaptured section 1250 gains on real estate therefore a net capital loss overall reduces the unrecaptured section 1250 gain to zero 4a section 1250 gain is recaptured upon the sale of depreciated real estate just as with any other asset the only difference is the rate at which it is taxed the justification for the gain is to offset the benefit of previously used depreciation allowances while the gains attributed to accumulated depreciation are taxed at the section 1250 recapture tax rate any remaining gains are only subject to the long term capital gains rate of 15 1example of unrecaptured section 1250 gainsif a property was initially purchased for 150 000 and the owner claims depreciation of 30 000 the adjusted cost basis for the property is considered to be 120 000 if the property is subsequently sold for 185 000 the owner has recognized an overall gain of 65 000 over the adjusted cost basis since the property has sold for more than the basis that had been adjusted for depreciation the unrecaptured section 1250 gains are based on the difference between the adjusted cost basis and the original purchase price this makes the first 30 000 of the profit subject to the unrecaptured section 1250 gain while the remaining 35 000 is taxed at the regular long term capital gains rate with that result 30 000 would be subject to the higher capital gains tax rate of up to 25 the remaining 35 000 would be taxed at the long term capital gains rate of 15 special considerationssince the unrecaptured section 1250 gains are considered a form of capital gains they can be offset by capital losses to do so the capital losses must be reported through form 8949 and schedule d and the value of the loss may vary depending on whether it is determined to be short term or long term in nature 15for a capital loss to offset a capital gain both must be determined to be short term or long term a short term loss cannot offset a long term gain and vice versa 