Section 1250

When selling real estate, it is important to understand the role of Section 1250 taxes. Section 1250 of the Internal Revenue Code governs the taxation of depreciable real property such as commercial buildings and rental homes.

When you claim depreciation on a property during ownership, it reduces the property's basis and thus increases your potential gain when you sell. The portion of the gain attributable to this depreciation is known as unrecaptured Section 1250 gain and is taxed differently from regular capital gains.

Key Points:

• Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%. 
• It applies to the portion of your gain equal to the depreciation you claimed.
• Any gain above the depreciated amount may qualify for the standard long-term capital gains tax rates (0%, 15%, or 20%).

 
For example, if you depreciated a rental property by $50,000 and later sold it for a profit, that $50,000 would be taxed at up to 25%, and any additional gain would be taxed at the long-term capital gains rate applicable to your income bracket.

Proper planning and record-keeping are essential to accurately calculate and report Section 1250 gains. Consulting a qualified tax professional is recommended to ensure compliance and optimize your tax outcome.