Upon the sale of real property where depreciation has been taken (or should have been taken), the seller will have what is called unrecaptured Section 1250 depreciation.
This is essentially all depreciation taken (or should have been taken).
The seller will compute the gain on the sale. The seller will then have to recharacterize some of the gain. This is the unrecaptured Section 1250 component. This is a recharacterization only. The portion of the gain that is recharacterized as Section 1250 will have a maximum of 25% tax rate.
A simple example:
Overall gain is $125,000
Unrecaptured Section 1250 is $75,000
The seller will have unrecaptured Section 1250 gain of the $75,000 taxed at a maximum of 25%
The seller will then have capital gain of $50,000; total gain $125,000
I agree meeting with a tax professional in situations such as this may be helpful.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
