7771. If accelerated depreciation is used, is part of the gain on the sale of real estate treated as “recaptured” ordinary income?Nuco Employeercline212014-07-14T18:04:00Z2014-07-14T18:04:00Z47274144Summit Business Media349486214Site Map/Investments/Real Estate/Sale/GeneralTaxFactsDefaultArticle122651235-00-tf2.xml1235.00;#1939;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2If accelerated depreciation is used, is part of the gain on the sale of real estate treated as “recaptured” ordinary income?23200.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:33:15Z7771. If accelerated depreciation is used, is part of the gain on the sale of real estate treated as “recaptured” ordinary income?Where certain accelerated methods of depreciating real estate have been used, some of the gain on sale of the property must be treated as ordinary income. In effect, some or all of the ordinary income offset by the depreciation must be “recaptured.” Only the gain in excess of the recaptured ordinary income may be treated as capital gain or “IRC Section 1231” gain. The amount of gain that must be treated as recaptured ordinary income will depend on whether the property is “recovery” property (that is, it was placed in service after 1980) or is depreciated under rules in effect prior to 1981. (If there is a loss on sale of the property, no “recapture” is necessary).IRC Sec. 1250(a).Recovery Property Held for One Year or LessIf property is not held for more than one year, an amount equal to 100 percent of the depreciation allowable is recaptured to the extent of gain.IRC Sec. 1250(b)(1).Property Placed in Service After 1986Residential rental real property and nonresidential real property placed in service after 1986 is depreciated under the straight line method and is not subject to the recapture rule if held for more than one year.Property Placed in Service before 1987 and After 1980If residential real property is held more than one year, gain on sale equal to 100 percent of “additional depreciation” is treated as ordinary income. Additional depreciation is the amount by which allowable depreciation deductions exceed the amount that would have been deducted if the investor had elected the straight line method of depreciation.IRC Sec. 1250(b)(1). Thus, if the owner elected the straight line method of cost recovery (depreciation), there would be no recapture.Nonresidential property held for more than one year is subject to much stricter recapture rules. If the property is depreciated by an accelerated method, 100 percent of the allowable depreciation deductions (not just “additional depreciation”) is recaptured (but not in excess of gain).IRC Sec. 1245(a)(5), as in effect prior to TRA ’86. However, if the individual used the straight line method of depreciation, there is no recapture.IRC Secs. 1245(a)(5)(C), as in effect prior to TRA ’86; 1250.Property Placed in Service Before 1981Residential and nonresidential rental properties placed in service before 1981 are subject to the same recapture rules that apply to residential property placed in service after 1980; that is, if accelerated depreciation has been used, the amount allowable in excess of the amount allowable under the straight line method is subject to recapture. This amount is called “additional depreciation.” The percentage of additional depreciation on property placed in service before 1981 is, in some instances, reduced, or phased out, if property is held over a certain length of time.The rules for determining the phase-out effect that the owner’s holding period will have on the percentage of additional depreciation to be recaptured varies for the periods 1964-1969, 1970-1975, and 1976-1980. Thus, if property was held during more than one period, the holding period must be divided into these periods for the purpose of determining (1) the additional depreciation attributable to the period; and (2) what percentage of that additional depreciation is recapturable.Depreciation for the period from 1976 through 1980. Additional depreciation allowable from 1976 to 1980 is recaptured in full, to the extent of any gain. However, low-income housing and rehabilitation expenditures are no longer subject to recapture. The 200 month total phase-out period (reduction by one percentage point per month after a 100 month holding period) for low-income housing and rehabilitation expenditures has elapsed.Depreciation for the period from 1970 through 1975. The percentage of additional depreciation for the years after 1969 and before 1976 that must be recaptured is determined by the classification of the property and the holding period. Low-income housing, property sold pursuant to a written contract in effect on July 24, 1964, residential rental property, and rehabilitation expenditures amortized over 60 months are no longer subject to recapture. All other property (i.e., commercial rental property) is subject to 100 percent recapture of additional depreciation.Depreciation for the period before 1970. Additional depreciation allowable before 1970 is no longer subject to recapture. The phase-out provisions applied to all types of real property and the 120 month period for total phase-out (reduction by one percentage point per month after a 20 month holding period) has elapsed.The recapture rules do not apply to dispositions by gift or to transfers at death. In a like-kind exchange, recapture applies to the extent of the boot received (see Q 535).