A client, Mr. Jones, sells a rental property for $900,000 on October 1, 2023. The property was purchased on January 1, 2010, for $600,000. During his ownership, Mr. Jones claimed $150,000 in straight-line depreciation. What is the amount of unrecaptured Section 1250 gain Mr. Jones must report?
- A$300,000
- B$0
- C$150,000
- D$450,000
Show answer & explanationAnswer & explanation
Correct answer: C. $150,000
Unrecaptured Section 1250 gain applies to real property and is the lesser of the recognized gain or the accumulated depreciation. Adjusted Basis = $600,000 (cost) - $150,000 (depreciation) = $450,000. Realized Gain = $900,000 (selling price) - $450,000 (adjusted basis) = $450,000. Since all depreciation was straight-line, there is no Section 1250 ordinary income recapture. However, the $150,000 of depreciation taken is subject to unrecaptured Section 1250 gain, taxed at a maximum rate of 25%. The recognized gain ($450,000) is greater than the accumulated depreciation ($150,000), so the unrecaptured Section 1250 gain is $150,000.
Why the other options are wrong
- A. This is the amount of gain that would be taxed at capital gains rates after the unrecaptured Section 1250 gain.
- B. This would be true if the property was not depreciated or if it was a personal residence.
- D. This is the total realized gain, which includes the unrecaptured Section 1250 gain and the Section 1231 gain.
Unrecaptured Section 1250 Gain
The cumulative straight-line depreciation taken on real property that is sold at a gain. This portion of the gain is taxed at a maximum rate of 25%, before any remaining gain is taxed at ordinary capital gains rates.
- Applies only to real property (Section 1250 property).
- Limited to the lesser of recognized gain or accumulated depreciation.
- Taxed at a maximum rate of 25%.
Memory trick: Real property gain: First depreciation, then capital reign.