Sec 1245, 1250, 1231

[Kurly]

Hello Out There

Does anyone have or know where a person could obtain a simple chart or table explaining the Sec 1245, 1250 and Sec 1231 items? Or a flow chart explaining the flow of same item?

Thanks

Kurly

[BOB W]

I'll bet......

.... you can find it in TTB.

[jimmcg]

Or go to irs.gov and click on publications.

[Brad Imsdahl]

Section 1245 and 1250 is in chart format on page 6-13. Section 1231 is explained on page 6-12.

[Kurly]

Thanks

Thanks is that the new one? I have not received mine yet. Ordered in early August

K

[Rlmea]

sec 1231;1245;1250 property

There was a great post on the ATX board last year by LindaB:

There was a posting a couple days ago that said the higher the section number, the higher vertically in the air.

Sec 1250 (highest number) is the roof (and rest of the building itself.
Sec 1245 -- 1245 is under 1250, so everything under the roof is 1245
Sec 1231 -- 1231 is lower than 1245, and what else is lower than the stuff in the building beside the LAND

OK, that way loosely paraphrased, but hopefully you get the point. Otherwise try searching for "1231" and hopefully that post will come up.

Robin

[jainen]

history

The history of these code sections can be helpful, and is also an interesting example of how the tax code is used for political goals.

In the old days, capital gains had the same tax rate but enjoyed a partial exclusion. Of course, the exclusion also applied to losses, and during the Great Depression the value of business assets fell. Nobody wanted to upgrade because the loss they would realize on the sale of the old equipment was only partly deductible while depreciation was fully deductible if they kept it.

To stimulate the economy, Congress changed the definition of capital assets to exclude business real estate and equipment. Losses were fully deductible.

That was fine for the 30's, but WW2 caused inflation and old equipment was then selling for a fully-taxable gain. Businesses again hesitated to reinvest, so Congress gave them the best of both worlds. Section 1231 property was the business real estate and equipment, which got the capital gains exclusion and the full deduction for losses.

That lasted 20 years until Congress decided the economy needed fixin' again. Some folks were making a fuss that it wasn't fair to give the big corps an ordinary deduction for depreciation and then another tax break on the gains created by the depreciation they had already deducted. Congress agreed that only real gain should get the capital gains exclusion. Accelerated depreciation had to be recaptured as ordinary income.

The new rule was divided into two parts for a very interesting reason--the Investment Tax Credit. This boost to modernizing business equipment was the star of the 1962 package, but it only applied to equipment (Section 1245), not real estate (Section 1250).

Well, it turns out that it isn't always easy to tell the difference, and many a court case wrestled with whether or not electrical wiring was part of the building. In another 20 years, everyone had had enough and Congress threw out component depreciation, then the ITC, and then the whole question of accelerated depreciation for real estate.

You might have thought that settled that, but real estate (Section 1250) had picked up some extra baggage along the way, so we still identify even SL depreciation as different from the rest of the capital gain.

[OldJack]

OK, that way loosely paraphrased, but hopefully you get the point. Otherwise try searching for "1231" and hopefully that post will come up.

Robin

Robin, that is a clever way of looking at the code sections. But, it should have pointed out that all those code sections are only for business property. Code section 1221 is the lowest code where non-business capital assets are defined, so you may have a "roof" that is §1221.

Jainen that was an excellent summary of the history. Thank you.

----
edit: I also should point out, for new preparers, that all business assets under §1255,1254,1252,1250,1245, and 1231 must first be reported on form 4797, "Sale of Business Property", before they can take the gain to Sch-D for capital gains rates. There are those that think they can "split" out the sale of the land (because it can't be depreciated) and go direct to Sch-D and that is incorrect as the land was used and classified as business property.