A taxpayer, Ms. Rodriguez, purchased an apartment building for $1,000,000 on January 1, 2010. The land was valued at $200,000. She sold the building on January 1, 2024, for $1,200,000. Total accumulated straight-line depreciation taken was $300,000. What is Ms. Rodriguez's unrecaptured Section 1250 gain?
- A$100,000
- B$0
- C$300,000
- D$200,000
Show answer & explanationAnswer & explanation
Correct answer: C. $300,000
Unrecaptured Section 1250 gain applies to depreciable real property and is the amount of gain attributable to prior depreciation taken, taxed at a maximum rate of 25%. Since straight-line depreciation was used, there is no Section 1250 ordinary income recapture (which only applies to accelerated depreciation in excess of straight-line). However, the entire gain attributable to depreciation (which is the lesser of the total gain or the accumulated depreciation) is taxed as unrecaptured Section 1250 gain. The adjusted basis of the building is $800,000 (cost of building $800,000 - $300,000 accumulated depreciation = $500,000). The land is not depreciable. The total gain on the building is $1,200,000 (selling price) - $200,000 (land FMV) - $500,000 (adjusted basis of building) = $500,000. The unrecaptured Section 1250 gain is the lesser of the total gain ($500,000) or the accumulated depreciation ($300,000). Thus, it is $300,000.
Why the other options are wrong
- A. This is incorrect. It might represent a partial gain calculation.
- B. This would be true if no depreciation was taken or if the property was not depreciable real property.
- D. This is incorrect. It might represent the gain on the land, which is not subject to 1250 recapture.
Unrecaptured Section 1250 Gain
A type of gain on the sale of depreciable real property (Section 1250 property) that is attributable to depreciation taken. It is taxed at a maximum rate of 25% for non-corporate taxpayers.
- Applies to depreciable real property.
- Taxed at a maximum 25% rate for individuals.
- Equals the lesser of total gain or accumulated depreciation.
- Different from Section 1250 ordinary income recapture (which only applies to accelerated depreciation).
Memory trick: 1250 is for 'R'eal property 'R'ate 25%.