1231 vs. 1245

  • Creator
    Topic
  • June 30, 2011 at 9:08 pm #160687
    rain11
    Participant

    Does the exam tell you when a property is classified 1231 or 1245?

    I understand the differences in tax treatment in 1231 or 1245 — I just don’t know why something gets treated as 1231 or 1245. Can someone explain this?

    Thank you!

    FAR - 04/19/2011 - 89
    AUD - 05/15/2011 - 91
    BEC - 05/31/2011 - 89
    REG - 7/02/2011 - TBD

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  • June 30, 2011 at 10:04 pm #287258
    rknight21
    Participant

    I am not studying for REG but i am taking business taxation right now. Base on my knowledge so far 1231 are personal asset used in the trade of business for more than one year.

    when a gain is recognized on the sale, the amount of the gain above the acc. depreciation is section 1231 gain. and everything up to the acc. depreciation is section 1245 ordinary income depreciation recapture.

    eg.

    an equipment is sold for 50,000. the book value is $40,000 and acc. depreciation is $20,000.

    adjusted basis is 40,000-20,000=20,000.

    gain realized is 50,000-20,000=30,0000

    now the gain of 30,000 is more than the acc. depreciation so in that case

    20,000 of that is section 1245 ordinary income depreciation recapture

    10,000 of that is section 1231 gain.

    June 30, 2011 at 10:13 pm #287259
    Anonymous
    Inactive

    Great explanation! Thank you!

    June 30, 2011 at 10:14 pm #287260
    Anonymous
    Inactive

    1231 = property used in trade or business

    1245 = personalty used in trade or business; the 1245 portion is limited to the amount of depreciation, any remaining gain is 1231; not possible to have 1245 loss

    1250 = realty used in trade or business, the 1250 portion is limited to the amount of depreciation taken less straight-line depreciation, not possible to have a 1250 loss

    July 1, 2011 at 1:48 am #287261
    rain11
    Participant

    thank you!

    FAR - 04/19/2011 - 89
    AUD - 05/15/2011 - 91
    BEC - 05/31/2011 - 89
    REG - 7/02/2011 - TBD

    July 1, 2011 at 2:08 am #287262
    Anonymous
    Inactive

    I was wracking my brain on this today and I'm so glad someone here asked this question for me as I was wondering the same thing. This clarifies a lot. Thank you!!

    July 1, 2011 at 3:57 am #287263
    rknight21
    Participant

    no prob

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