Page 390 - TaxAdviser_2022

Taxpayers need to
understand how
property will be

depreciated and
whether there are
any alternative
options or elections
they can make that
may lead to a better
overall result in
terms of depreciation
recapture.

In a general sense, Sec. 1250 applies Like Sec. 1245, Sec. 1250 may
Depreciation to real property, and Sec. 1245 applies to require a taxpayer to treat some of the
personal property. However, under the gain on the disposition of depreciable
Depreciation recapture in the definitions in both sections, some real property as ordinary income (Regs. Sec.
partnership context property may fall under the Sec. 1245 1.1250-1(a)(1)(i)). The amount subject
Depreciation recapture provisions may rules. This distinction can be important, to recharacterization is the lesser of (1)
be applied incorrectly in some situa- as will be discussed. the additional depreciation attributable
tions and have implications that are In its simplest form, Sec. 1245 to periods after Dec. 31, 1975; or (2)
overlooked in others. Their application requires a taxpayer to treat the gain on the taxpayer’s gain on the property (Sec.
can significantly affect the tax impact of disposition of depreciable property as 1250(a)(1)(A)). Unlike Sec. 1245, Sec.
a transaction in total or among various ordinary income. The amount subject 1250 does not look to the total deprecia-
owners of an entity taxed as a partner- to recharacterization is the lesser of tion deductions allowed or allowable
ship. After first providing background (1) the prior depreciation deductions but instead looks at the additional
on Secs. 1245 and 1250, this item allowed or allowable; or (2) the tax- depreciation. What, then, is additional
discusses how depreciation recapture payer’s gain on the property (Regs. Sec. depreciation? Additional depreciation is
applies in certain situations involv- 1.1245-1(a)). defined in Regs. Secs. 1.1250-2(a)(1)(i)
ing partnerships. and (ii) as:
Example 1: A and B are and have
Background been since inception equal partners (i) In the case of property which
The general purpose of Secs. 1245 and of Partnership AB. Partnership at the time of disposition has
1250 is to require taxpayers that dispose AB purchases Sec. 1245 property a holding period under sec-
of property used in a trade or business in year 1 for $200, and bonus de- tion 1223 of not more than 1
year, the “depreciation adjust-
(specifically, Sec. 1231 property) to
preciation is claimed for the entire
IMAGE BY BOUILLANTE/GETTY IMAGES gain as ordinary income, due to prior Partnership AB sells the property (ii) In the case of property which
recharacterize all or a portion of their
amount. In a subsequent year,
ments” (as defined in paragraph
(d) of this section) in respect of
for $150. Partnership AB recognizes
such property for periods after
depreciation deductions the taxpayer was
Sec. 1245 gain of $150, which is
December 31, 1963, and
allowed to take against ordinary income.
the lower of the recomputed basis
Before discussing the recharacterization
at the time of disposition has
of gain, it is important to understand
($200) or the amount realized
a holding period under section
($150), minus the property’s ad-
what types of property these deprecia-
tion recapture Code sections apply to.
August 2022 7
www.thetaxadviser.com justed basis ($0). 1223 of more than 1 year, the