Unrecaptured Section 1250 gains are depreciation recapture on the sale of depreciable real estate used in a trade or business. The unrecaptured Section 1250 amount is a component of the overall Section 1231 gains or losses.
The character of unrecaptured Section 1250 amounts are capital gains subject to ordinary income tax rates; however, the maximum tax rate that may apply to unrecaptured Section 1250 amounts is 25%. As of 2023, long-term capital gains are subject to a maximum 20% tax rate.
Example of Unrecaptured Section 1250 Amounts
Company LLC, a partnership for federal tax purposes, purchased a single-family rental property for $500,000 on January 1, 2019. The company allocated $400,000 to the building and $100,000 to the land.
The LLC depreciated the building using the straight-line method over 27.5 years. On June 30, 2023, the LLC sold the property for $600,000. As of June 30, 2023, the company claimed $65,450 of depreciation expense, which reduced its adjusted cost basis in the property to $434,550 (i.e., $500,000 – $65,450 = $434,550).
With a sale price of $600,000, the total gain is $165,450 (i.e., $600,000 – $434,550 = $165,450). The entire gain of $165,450 is Section 1231 gain. Of the Section 1231 gain, the unrecaptured Section 1250 gain is the $65,450 of depreciation expense.
The Schedule K-1 (Form 1065) has separate line items for the Section 1231 gain and unrecaptured Section 1250 gain. Each partner in the LLC receives a Schedule K-1 and uses the “Unrecaptured Section 1250 Gain Worksheet” found in the Schedule D instructions to calculate the amount of tax owed on the unrecaptured Section 1250 gains.
Video Tutorial on Unrecaptured Section 1250
Please visit our YouTube channel for a video tutorial on unrecaptured Section 1250 gains and reporting on Form 1065 (US Return of Partnership Income) and Form 1040 (US Individual Income Tax Return).