Extra Recapture Materials. Property Transactions: § 1231 and Recapture Provisions

Extra Recapture Materials. Property Transactions: §1231 and Recapture Provisions Recapture

Note from Instructor-1 Capital losses can be deducted from capital gains, if you have capital gains. It is critical for us to understand that capital loss deductions (from ordinary income) are limited to $3,000 per year for individuals and to zero for corporations. In a depression, a corporation may need to sell (or abandon) excess factories and equipment. If the loss on the sale is subject to the capital loss limit, the deduction is of no value during a depression. Recapture

Note from Instructor-2 Therefore, the corporation wants production assets to be classified as ordinary assets (not capital assets) so the loss on the sale can be deducted, possibly creating a net operating loss to be carried back to another year-resulting in a refund of back taxes and a source of much needed cash. So, businesses want buildings and equipment to be “non” capital assets. Recapture

Note from Instructor-3 The situation changes in boom times when equipment is being sold at a gain. Then, individuals want such assets to be classified as capital assets so they can take advantage of the 15% maximum rate on capital gains. Corporations want the assets to generate capital gains because they may have accumulated capital losses that will offset the capital gains. Recapture

Note from Instructor-4 Congress has listened to the lobbyists, and showed their appreciation for the campaign contributions. Buildings and equipment used in a business, as well as land, are not capital assets. (Sec. 1221) However, if you have net gains from the sale of these assets you are allowed to “pretend” the assets are capital assets, and report the gains as capital gains. (Sec. 1231) Recapture

Note from Instructor-5 This creates a loophole. Buy a $400,000 machine. Depreciate it very fast – claiming deprec. of say $100,000. That leaves a book value of $300,000. Now lets assume you sell it for $400,000. You have a $100,000 gain. It is capital gain, but.!! (Sec. 1245) Congress said that to the extent a gain represents depreciation on personal property-- that much of the gain is ordinary income-- and any additional gain is capital gain. This company will report $100,000 ordinary income (recaptured) on the sale of the asset. If they sell the asset for $410,000, there is capital gain of $10,000. The remaining $100,000 gain is reported as ordinary income. Recapture

Note from Instructor-6 (Sec. 1250) It is more complicated with buildings, because we may be recapturing only the excess of actual depreciation taken over what would have been taken with straight-line method. Since the law has only allowed straight-line depreciation on real estate since 1986, our main focus is on buildings on which straight-line depreciation has been claimed. It is more complicated for Corporations selling buildings because they have extra recapture under Sec. 291. Compare actual depreciation recapture under Sec. 1250 (probably zero) with what would have been recaptured under Section 1245 (gain up to amount of depreciation claimed). Subtract 1250 recapture from hypothetical 1245 recapture, and take 20% of this difference. This computation gives you corporate recapture amount under Sec. 291. Recapture

Recapture

Note from Instructor-7 Recapture

Lookback Example Taxpayer had the following §1231 gains and losses: 2007 $ 4,000 loss 2008 10,000 loss 2009 16,000 gain • In 2009, taxpayer’s net §1231 gain of $16,000 will be treated as $14,000 of ordinary income and $2,000 of long-term capital gain Recapture

Lookback Provision - More Recapture

§1245 Recapture Corp. sells for $240,000, equipment which it had placed in service two years earlier. The equipment had cost $250,000, and depreciation deductions of $30,000 had been taken on the equipment. The results of the sale are a. Ordinary income of $20,000. b. Sec. 1231 gain of $20,000. c. Capital gain of $20,000. d. None of the above. Recapture

§1245 Recapture How is gain reported if this asset is sold for $260,000? What is the deduction, if the asset is given to charity? Recapture

§1245 Recapture • Notice on the preceding slide that all gain was recaptured. • This is because all gain represented recapture of prior depreciation. • You would have to sell the equipment for more than $250,000 to get any capital gain under Section 1231. Recapture

§1245 Recapture Taxpayer sold equipment used in his business for $11,000. The equipment cost $10,000.TP had properly claimed ACRS deductions totaling $4,000. Straight-line depreciation, if it had been used, would have been $2,500. What is the amount of gain that should be reported under sections 1231 and 1245? Section 1231Section 1245 a. $5,000 $0 b. $3,500 $1,500 c. $1,000 $4,000 d. $0 $5,000 Recapture

§1245 Recapture Recapture

Recapture Review - 1 Recapture

Recapture Review - 2 Recapture

Extra Recapture Materials. Property Transactions: § 1231 and Recapture Provisions