Section 1250
Contents
Unraveling Section 1250: Taxation of Depreciated Real Property
Understanding the intricacies of Section 1250 of the U.S. Internal Revenue Code is crucial for investors, property owners, and tax professionals alike. Let's delve into what Section 1250 entails, how it impacts the taxation of depreciated real property, and real-world applications through examples.
Exploring Section 1250: A Comprehensive Overview
Section 1250 of the U.S. Internal Revenue Code governs the taxation of gains from the sale of depreciated real property. It stipulates that if the accumulated depreciation exceeds the depreciation calculated using the straight-line method, the IRS will tax the gain from the sale of the property as ordinary income.
Understanding the Basics of Section 1250
Section 1250 applies primarily to depreciable real property, such as commercial buildings, rental properties, and their structural components. It becomes relevant when property owners utilize accelerated depreciation methods, resulting in larger deductions early in the asset's life. The section mandates that any difference between actual depreciation and straight-line depreciation is subject to ordinary income tax.
An Example Illustrating Section 1250 in Practice
To grasp the application of Section 1250, consider a scenario where an investor purchases a $800,000 property and claims $120,000 in accumulated depreciation over five years. If the property is sold for $750,000, the IRS would tax the $20,000 difference between actual and straight-line depreciation as ordinary income, with the remaining gain subject to capital gains tax.