Real Estate Sales

Today TaxMama hears from Fred in the TaxQuips Forum, with a technical question. “Page 32 of the 2010 Instructions for Form 1120S (the S Corporation tax form) explains how to determine the adjusted gain or loss to enter on line 15b of the 1120S schedule K-1 (the partners’ share of income and transactions). Then it says that if any part of the adjustment is net section 1231 gain (loss), “identify the amount of adjustment that is unrecaptured section 1250 gain“. How do I figure out the amount of the adjustment that is unrecaptured 1250 gain?” 


Dear Fred,

This sounds like gobbledygook, doesn’t it?  Well, first you have to know what Internal Revenue Code Section 1250 is. Then you need to know what IRC Sec 1231 is. Or vice versa.

Essentially, with Sec 1231, what you have is a capital gain from the sale of an asset used for business. If there is a Sec 1250 recapture, it’s because the business asset is real estate. You recapture the depreciation, when the depreciation taken (or that should have been taken) exceeds straight-line depreciation taken over 40 years.

That part of the gain will be treated as ordinary income, subject to a tax rate of 25%, instead of the 0% or 15% of capital gains rates.

Does all this sound like even more gobbledygook?  This may be a bit complicated if you are not a tax professional. (Heck, it’s complicated even if you are!) If you don’t CLEARLY understand this explanation, I urge you to work with a tax professional to properly compute the gain or loss from the sale of the real estate – and any related Sec 1250 recapture.

Because, if you don’t understand my explanation, it’s quite likely that you also don’t have the correct basis for the property – and that may need to be corrected or adjusted before reporting the sale.

While I truly encourage people to learn to prepare your own tax return, there are some tax returns that should not be done by amateurs. Tax returns involving the sales of business assets and/or real estate should be prepared only by experienced professionals. Sometimes, even we have to dig deeper and research issues involved in the transactions.

And remember, you can find answers to all kinds of questions about recaptures and other tax issues, free. Where? Where else? At

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