1250 Property: What Is It, Function, Importance, and More

The 1250 tax code set by the Internal Revenue Service of the United States says that the IRS will gain a tax from the sale of a depreciated property if the depreciation exceeds a certain threshold. Such a specially depreciated property is called a 1250 Property. If the depreciation of the property exceeds the depreciation as calculated by the straight-line methods, then it is a 1250 property.

In this article, you will learn about what 1250 property means and which types of properties are considered 1250 assets. Furthermore, you will also learn what types of properties (buildings, land, etc.) are classified as 1250 properties. Later on, you will also learn about some of the major provisions of Section 1250. Finally, we will discuss some of the essential details related to the 1250 property.

1250 Property Definition – What Is Property Type 1250?

According to Investopedia.com, “Section 1250 of the United States Internal Revenue Code is a rule establishing that the IRS will tax a gain from the sale of depreciated real property as ordinary income if the accumulated depreciation exceeds the depreciation calculated with the straight-line method.”

Section 1250 of the tax code says that there are two types of properties that can depreciate. One of the properties follows the Straight-Line Depreciation method. These properties do not fall under Section 1250.

The properties that do not follow the rules of the Straight-Line depreciation method are classified as 1250 properties. As per the rules, the IRS will take taxes from the sale of these properties.

Furthermore, Section 1250 also considers the amount of tax that is due on a type of property based on whether it is residential or non-residential. It also factors its considerations about how many months the tax filer owned the 1250 property in question.

Is Land 1250 Property?

Section 1250 applies to depreciated properties like commercial buildings, barns, warehouses, rental properties, etc., and their structural components. The ordinary tax rate is applied to such properties. Hence, you can be sure that land, as well as tangible and intangible personal properties, do not fall under this tax regulation of the US Internal Revenue Service.

What Does Section 1250 Say?

According to IRS.gov, a Section 1250 property “includes all real property that is subject to an allowance for depreciation and that is not and never has been Section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable.”

Furthermore, the website also states that if your 1250 property becomes a property type 1245, then this tax provision is not applicable to the property.

Basically, Section 1250 addresses the taxing structure of gains made on a depreciated property, provided the method of depreciation followed is the accelerated depreciation method. This method leads to larger deductions in the early life of the given real asset. On the other hand, in a Straight-Line Method, the deductions are less.

Here, the taxable portion is the difference between the actual depreciation amount and the straight-line depreciation amount. The taxes should apply as in the case of an ordinary income.

What Is Unrecaptured Section 1250 Gain?

The unrecaptured section 1250 gain is an interesting tax rule which considers the previously recognized depreciation as an income. Hence, tax is applicable to it. However, this only applies when there is a gain on the sale of the real estate in depreciation.

An article on FreshBooks.com claims – “As of 2022, unrecaptured section 1250 gains are subject to the ordinary tax rate, which is maxed out at 25 percent. The recaptured amount is taxed at the capital gain tax rate of 0%, 15%, or 20%. Schedule D instructions include a worksheet for calculating unrecaptured section 1250 gains, which are then reported on Schedule D and carried over to the taxpayer’s 1040.”

You can report an unrecaptured section 1250 gain with the help of Form 4797, and the sum to be paid is then transferred to Schedule D of the tax provision. These gains are taxed at ordinary tax rates, which can be only up to 25% of the gains made.

However, this rate is quite higher than two other long-term capital gains tax rates (ranging from 0 to 20% depending on your gains). Most of the long-term capital gains are taxed at 0 to 15% of the gain, which is at least 10% lower than the unrecaptured Section 1250 gain.

Furthermore, you will need to understand here that these unrecaptured Section 1250 gains apply only to the depreciation methods allowed.

How Is Depreciation Calculated With The Straight-Line Method?

The formula to calculate the Straight-Line depreciation method is-

According to Realized1031.com, “The straight-line depreciation method spreads depreciation evenly across the life of the property…As an example, if a property costs $1 million, has a salvage value of $200,000, and a useful life of 40 years, depreciation of {($1 million – $200,000) / 40} = $20,000 can be taken each year for 40 years.”

However, you will need to understand here that the straight-line depreciation method has some limits to it as well. It allows a residential property to be deducted for up to 27.5 years. In the case of commercial properties, the years to be deducted can be up to 39 years only if it is in service after 5th December 1993.

Bottom Line

Section 1250 of the tax code set by the United State Internal Revenue Service states that a depreciated property is taxable at the time of sale if the accumulated depreciation exceeds the Straight-Line Method depreciation. A 1250 property is thus taxable as ordinary income.

An example of such property is the one when a company depreciates its real estate with the use of the accelerated depreciation method and not the Straight-Line Method. What is your personal take on Section 1250 of the tax code? Share your views on it in the comments section below.

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