Philip and Margery Skalka - Page 12

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          respectively.  Sec. 1231(a)(1).  Accordingly, the gain                      
          petitioners recognized on the sale of the investment property is            
          long-term capital gain.                                                     
               Pursuant to section 1250(c), section 1250 property is any              
          real property subject to the allowance for depreciation that is             
          not section 1245 property.  The investment property in the hands            
          of petitioners was real property subject to the allowance for               
          depreciation.  Further, petitioners’ investment property is not             
          of any kind described in section 1245(a)(3).  Therefore,                    
          petitioners’ investment property is also section 1250 property.             
               Gain realized on the disposition of section 1250 property is           
          recaptured as ordinary income, rather than capital gains, to the            
          extent that the depreciation amount allowed or allowable exceeds            
          the amount of depreciation that would have resulted under the               
          straight-line method.  See sec. 1250(a).  Pursuant to section               
          1250(a)(1)(A), the section 1250 gain shall be recognized as                 
          ordinary income notwithstanding any other provisions of subtitle            
          A of the Code.  Therefore, since petitioners’ section 1231                  
          property is also subject to depreciation recapture under section            
          1250, the amount of the long-term capital gain would be reduced             
          by the amount of section 1250 gain recaptured at ordinary income            
          tax rates.                                                                  
               The 1997 Act amended section 1(h) to include section                   
          1(h)(1)(B), which taxes unrecaptured section 1250 gain at a                 





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