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If your section 1250 property becomes sec- after taking depreciation deductions of $1,000 which the actual depreciation adjustments were
tion 1245 property because you change its use, on the property, of which $200 is additional de- allowed.
you can never again treat it as section 1250 preciation, your child sells the property. At the
property. time of sale, the additional depreciation is $700 Applicable Percentage
($500 allowed to you plus $200 allowed to your
Additional Depreciation child). The applicable percentage used to figure the
If you hold section 1250 property longer than 1 Depreciation allowed or allowable. The ordinary income because of additional depreci-
ation depends on whether the real property you
greater of depreciation allowed or allowable (to
year, the additional depreciation is the actual disposed of is nonresidential real property, resi-
depreciation adjustments that are more than the any person who held the property if the depreci- dential rental property, or low-income housing.
ation was used in figuring its adjusted basis in
depreciation figured using the straight-line The percentages for these types of real prop-
method. For a list of items treated as deprecia- your hands) is generally the amount to use in erty are as follows.
figuring the part of the gain to be reported as or-
tion adjustments, see Depreciation and amorti-
zation under Gain Treated as Ordinary Income, dinary income. If you can show that the deduc- Nonresidential real property. For real prop-
tion allowed for any tax year was less than the
earlier. For the treatment of unrecaptured sec- erty that is not residential rental property, the
tion 1250 gain, see Capital Gains Tax Rates, amount allowable, the lesser figure will be the applicable percentage for periods after 1969 is
depreciation adjustment for figuring additional
later. depreciation. 100%. For periods before 1970, the percentage
is zero and no ordinary income because of ad-
If you hold section 1250 property for 1 year Retired or demolished property. The adjust- ditional depreciation before 1970 will result from
or less, all the depreciation is additional depre- ments reflected in adjusted basis generally do its disposition.
ciation. You will not have additional deprecia- not include deductions for depreciation on re-
tion if any of the following conditions apply to tired or demolished parts of section 1250 prop- Residential rental property. For residential
the property disposed of. erty unless these deductions are reflected in the rental property (80% or more of the gross in-
• You figured depreciation for the property basis of replacement property that is section come is from dwelling units) other than low-in-
using the straight-line method or any other 1250 property. come housing, the applicable percentage for
method that does not result in depreciation periods after 1975 is 100%. The percentage for
that is more than the amount figured by the Example. A wing of your building is totally periods before 1976 is zero. Therefore, no ordi-
straight-line method; you held the property destroyed by fire. The depreciation adjustments nary income because of additional depreciation
longer than 1 year; and, if the property was figured in the adjusted basis of the building after before 1976 will result from a disposition of resi-
qualified property, you made a timely elec- the wing is destroyed do not include any deduc- dential rental property.
tion not to claim any special depreciation tions for depreciation on the destroyed wing un-
allowance. In addition, if the property was less it is replaced and the adjustments for de- Low-income housing. Low-income housing
in a renewal community, you must not preciation on it are reflected in the basis of the includes all of the following types of residential
have elected to claim a commercial revital- replacement property. rental property.
ization deduction for property placed in • Federally assisted housing projects if the
service before January 1, 2010. Figuring straight-line depreciation. The mortgage is insured under section 221(d)
• The property was residential low-income useful life and salvage value you would have (3) or 236 of the National Housing Act or
rental property you held for 16 2 /3 years or used to figure straight-line depreciation are the housing financed or assisted by direct loan
longer. For low-income rental housing on same as those used under the depreciation or tax abatement under similar provisions
which the special 60-month depreciation method you actually used. If you did not use a of state or local laws.
for rehabilitation expenses was allowed, useful life under the depreciation method ac- • Low-income rental housing for which a de-
the 16 2 /3 years start when the rehabilitated tually used (such as with the units-of-production preciation deduction for rehabilitation ex-
property is placed in service. method) or if you did not take salvage value into penses was allowed.
• You chose the alternate ACRS method for account (such as with the declining balance • Low-income rental housing held for occu-
the property, which was a type of 15-, 18-, method), the useful life or salvage value for fig- pancy by families or individuals eligible to
or 19-year real property covered by the uring what would have been the straight-line de- receive subsidies under section 8 of the
section 1250 rules. preciation is the useful life and salvage value United States Housing Act of 1937, as
• The property was residential rental prop- you would have used under the straight-line amended, or under provisions of state or
erty or nonresidential real property placed method. local laws that authorize similar subsidies
in service after 1986 (or after July 31, Salvage value and useful life are not used for low-income families.
1986, if the choice to use MACRS was for the ACRS method of depreciation. Figure • Housing financed or assisted by direct
made); you held it longer than 1 year; and, straight-line depreciation for ACRS real prop- loan or insured under Title V of the Hous-
if the property was qualified property, you erty by using its 15-, 18-, or 19-year recovery ing Act of 1949.
made a timely election not to claim any period as the property's useful life. The applicable percentage for low-income
special depreciation allowance. These The straight-line method is applied without housing is 100% minus 1% for each full month
properties are depreciated using the any basis reduction for the investment credit. the property was held over 100 full months. If
straight-line method. In addition, if the you have held low-income housing for at least
property was in a renewal community, you Property held by lessee. If a lessee 16 years and 8 months, the percentage is zero
must not have elected to claim a commer- makes a leasehold improvement, the lease pe- and no ordinary income will result from its dis-
cial revitalization deduction. riod for figuring what would have been the position.
straight-line depreciation adjustments includes
Depreciation taken by other taxpayers or all renewal periods. This inclusion of the re- Foreclosure. If low-income housing is dis-
on other property. Additional depreciation in- newal periods cannot extend the lease period posed of because of foreclosure or similar pro-
cludes all depreciation adjustments to the basis taken into account to a period that is longer ceedings, the monthly applicable percentage
of section 1250 property whether allowed to you than the remaining useful life of the improve- reduction is figured as if you disposed of the
or another person (as carryover basis property). ment. The same rule applies to the cost of ac- property on the starting date of the proceed-
quiring a lease. ings.
Example. You give your child section 1250 The term “renewal period” means any period
property on which you took $2,000 in deprecia- for which the lease may be renewed, extended, Example. On June 1, 2022, you acquired
tion deductions, of which $500 is additional de- or continued under an option exercisable by the low-income housing property. On April 3, 2021
preciation. Immediately after the gift, your lessee. However, the inclusion of renewal peri- (130 months after the property was acquired),
child’s adjusted basis in the property is the ods cannot extend the lease by more than foreclosure proceedings were started on the
same as yours and reflects the $500 additional two-thirds of the period that was the basis on property, and on December 3, 2022 (150
depreciation. On January 1 of the next year, months after the property was acquired), the
Chapter 3 Ordinary or Capital Gain or Loss for Business Property Page 29