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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3093
Experience:  I've prepared all types of taxes since 1987.
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i have an S corproation client who sold a commercial building in 2007. The proceeds were 1,300,000.00. I calculated the gain as 1,201,000.00 (The basis, land of 85,000.00 and the closing closts of 13,000.00).

The building was bought in 1979 and recorded at 380,000.00. It is fully depreciated.

Is the 380,000 depreciation considered unrecaptured section 1250 gain? Is it taxed at 25%? Do the rules of Secton 291 apply to this?
Thank you.
Submitted: 6 years ago.
Category: Tax
Expert:  jgordosea replied 6 years ago.

Greetings,

"Unrecaptured section 1250 gain" refers to gain that is eligible for capital gain treatment and that is attributable to allowable depreciation. For real estate placed in service after 1980, all depreciation deductions allowable before the sale of the real estate are part of unrecaptured section 1250 gain. To the extent the amount of allowed depreciation isn't recaptured as ordinary income, it will be taxed at a rate of 25%.

For real estate placed in service before 1981 that used a declining balance method to depreciate the real property (which was possible then) the excess of depreciation claimed over straight-line depreciation is recaptured as ordinary income and is taxed at ordinary income rates not eligible for capital gain rates. To the extent the amount of allowed depreciation isn't recaptured as ordinary income, it will be taxed at a rate of 25%.

The application of the section 291 tax-preference provisions to an S corporation is governed by section 1363(b)(4). Section 1363(b)(4) states that section 291 applies to an S corporation if the corporation has been a C corporation during any of the preceding three taxable years. So, there is not enough information provided; but the provision is clear. After the expiration of the three-year period for an S corporation, that corporation is no longer subject to any of the provisions of section 291.

I hope this information is helpful to correctly apply the section 1250 and section 291 provisions.

 

Customer: replied 6 years ago.
Just to be sure I was correct. The 380,000 depreciation will be taxed at 25% and the ramaining gain at 15%, and the section 291 will not apply since this corporation has always been an S corp?

Thank you
Expert:  jgordosea replied 6 years ago.

Hello again,

You are correct if the depreciation claimed was only via the straight line method.

If a declining balance method was used (which was possible in 1979) the excess of depreciation claimed over straight-line depreciation is recaptured as ordinary income and is taxed at ordinary income rates.

I hope this helps to clarify.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3093
Experience: I've prepared all types of taxes since 1987.
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jgordosea
jgordosea
Enrolled Agent
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I've prepared all types of taxes since 1987.