c.

MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 503

b. Sec. 1245 property generally includes depreciable tangible and intangible personal property, for

example
(1) Desks, machines, equipment, cars, and trucks
(2) Special-purpose structures, storage facilities, and other property (but not buildings and struc-
tural components); for example, oil and gas storage tanks, grain storage bins and silos, and es-
calators and elevators
d. Sec. 1245 recovery property means all ACRS recovery property placed in service after 1980
and
before 1987 other than nineteen-year real property that is classified as real residential rental prop-
erty, real property used outside the US, subsidized low-income housing, and real property for
which a straight-line election was made.
NOTE: If the cost of nineteen-year nonresidential real property placed in service before 1987 was recovered using the
prescribed percentages of ACRS, the gain on disposition is ordinary income to extent of all ACRS deductions. Such re-
capture is not limited to the excess of accelerated depreciation over straight-line. However, if the straight-line method
was elected for nineteen-year real property, there is no recapture and all gain is Sec. 1231 gain.

d. Sec. 1245 does not apply to real residential rental property and nonresidential real property
placed
in service after 1986 because only straight-line depreciation is allowable.

e. Upon the disposition of property subject to Sec. 1245, any recognized gain will be ordinary
in-
come to the extent of all depreciation or post-1980 cost recovery deductions.
(1) Any remaining gain after recapture will be Sec. 1231 gain if property held more than one year.
EXAMPLE: Megan sold equipment used in her business for $11,000. The equipment had cost $10,000 and
$6,000 of depreciation had been taken, resulting in an. adjusted basis of$4,000. Megan's recognized gain is
$11,000 - $4,000 = $7,000. Since the equipment was Sec. 1245 property, the gain must be recognized as Sec.
1245 ordinary income to the extent of the $6,000 of depreciation deducted. The remaining $1,000 gain
($7,000 gain - $6,000 ordinary income) is recognized as Sec. 1231 gain.

EXAMPLE: Assume the same facts as in the preceding example, except the equipment was soldfor $9,000.
Megan's recognized gain would be $9,000 - $4,000 = $5,000. Now, since the $6,000 of depreciation de-
ducted exceeds the recognized gain of $5,000, the amount of Sec. 1245 ordinary income would be limited to
the recognized gain of $5,000. There would be no Sec. 1231 gain.

EXAMPLE: Assume the same facts as in the first example, except the equipment was sold for only $3,500.
Megan's sale of the equipment now results in a recognized loss of$3,500 - $4,000 = ($500). Since there is
loss, there would be no Sec. 1245 depreciation recapture and the $500 loss would be classified as a Sec. 1231
loss.

(2) If the disposition is not by sale, use FMV of property (instead of selling price) to determine
gain.

(a) When boot is received in a like-kind exchange, Sec. 1245 will apply to the recognized
gain.
EXAMPLE: Taxpayer exchanged his old machine (adjusted basis of $2,500) for a smaller new machine
worth $5,000 and received $1,000 cash. Depreciation of $7,500 had been taken on the old machine. The
realized gain of $3,500 ($6,000 - $2,500) will be recognized to the extent of the $1,000 boot, and will be
treated as ordinary income as the result of Sec. 1245.

(b) Sec. 1245 recapture does not apply to transfers by gift (including charitable contributions)

$150,000
(30.000)
$1212JJQ
f1
 or transfers 'at death.

4. Section 1250 Recapture

a. Applies to all real property (e.g., buildings and structural components) that is not Sec. 1245
recov-
ery property.

(1) If Sec. 1250 property was held twelve months or less, gain on disposition is recaptured as or-
dinary income to extent of all depreciation (including straight-line).

(2) If Sec. 1250 property was held more than twelve months, gain is recaptured as ordinary in-
come to the extent of post-1969 additional depreciation (generally depreciation in excess of
straight-line).
EXAMPLE: An office building with an adjusted basis of$200,000 was sold by individual Xfor $350,000.
The property had been purchasedfor $300,000 in 1980 and $100,000 of depreciation had been deducted.
Straight-line depreciation would have totaled $70,000.

Total gain ($350,000- $200,000)

Post-1969 additional depreciation recaptured as ordinary income
Remainder is Sec. 1231 gain