Navigating the Confluence of Code Secs. 1031 and 1250
7 Pages Posted: 24 May 2016 Last revised: 1 Jun 2016
Date Written: May 23, 2016
Sections 1031 and 1250 of the Internal Revenue Code both present complexities, and when the two provisions intersect, the complexities seem to multiply exponentially. Section 1031 provides for nonrecognition of gain on the exchange of property, including most types of real estate. Section 1250, on the other hand, operates to tax gain from the sale of real estate at rates that are often higher than the regular rate that applies to long-term capital gains, and it can override section 1031 in some situations. Section 1250, a depreciation recapture provision, does not apply directly to most real estate transactions, but it often applies indirectly through section 1(h) to tax long-term capital gains, i.e., unrecaptured section 1250 gain, at a higher rate. The indirect application can create confusion when it combines with a section 1031 exchange. This article shows how the various limits and exceptions in sections 1(h) and 1250 work together to determine the tax rates, if any, that apply when both sections 1031 and 1250 apply to a transaction.
Keywords: Section 1031 Exchange, Section 1250 Recapture, Unrecaptured Section 1250 Gain
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