[Anonymous]

Ok what is the real difference between a section 1231 and section 1250 building that was put in service for depreciation. I am thoroughly confused by this. According to Becker Section 1231 assets are compriosed of depreciable and persoanl prorpety used in the taxpayer’s trade or business held over for 12 months.

Section 1250: are real properties used in a trade or business over 12 months (e.g. a warehouse).

Becker did not make it exactly easy to specify the difference between a building. Normally, if i see a question on a test should I assume it is a Section 1250???

Also, too are there any tips for the research tab for the sim…..the previous two times I have taken this exam I have come up empty and I could use some advice to add a few more points to my score.

Thanks

[Anonymous]

From my understanding, section 1231 relates to real property, with the exclusion of investment and inventory, used in trade or business and is thus depreciable. Also, when a sale of these items is made, they are netted with other capital gains and losses, however any gain is taxed as a capital gain and any loss is taxed as an ordinary gain. I think this is the key concept you must understand.

Section 1250 I does not relate to business property but is depreciated. When a sale occurs, the gain from the sale price less the tax basis should be considered ordinary income.

I hope this helps.

Good luck on your exam!

[Whopper Warrior]

Sec 1245 and 1250 property are section 1231 property but they come into effect before section 1231 treatment (long term gain)

Sec 1245 – Equipment

Section 1250 – Building

Easy way to remember the difference is you pay less for equipment then you do a building, and hence equipment is 1245 which is smaller then 1250 (a building). Usually they will be easily distinguishable (eg. equipment vs building)

1245 and 1250 is established to recapture income at ordinary rates before long term gain treatment. Example:

Equipment

Original Cost: 50

Basis 35

Selling Price: 60

1245 Gain: 15 (ordinary)

1231 Gain: 10 (long term)

If the selling price was 40

1245 gain: 5

1231 Gain: 0

If it was a building it would be Section 1250. But more likely than not, the examiners will not care about whether you know its 1250 or 1245 but rather if the gain should be treated as ordinary / long term income. They established 1245 and 1250 to stop people from gaining favorable tax treatment.

Example: I buy a machine says it has a 3 year life and depreciate if for a 1/3. I then sell it a year later for 1.2x the buying price. They do not want to give you a 1/3 ordinary loss and then recapture it as a long term gain, . Think of it like state income tax recapture for individuals who itemize.

1245 / 1250 : Gain up to original basis (aka depreciation taken) = Ordinary Income

1231: Excess of selling price over 1245/1250 recapture / Total for Land = Long Term

Land does not depreciate so its always 1231 property. If you took depreciation; plan on a recapture provision when you sell it for a gain.

Research: Use buzzwords and practice. The IRC is a pain to navigate for it is written by lawyers for lawyers.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[KDunc]

Thank you for the Sec 1231, 1245, 1250 clarification/simplification!

FAR:91 2/28/13
AUD:89 5/29/13
REG:75 8/30/13
BEC:? 11/21/13 Waiting
(Yaeger, Wiley, CPA Review for Free)

[iwantmylifeback_]

There's a good video on YouTube that sums it up nicely. Search yaegar 1231

BEC 85
AUD 99
REG 88
FAR 93

[Anonymous]

@Whopper Warrior – Great explaniation, thank you. Seems that you did very well on REG, and last minute advice for studying? Looks like we are both in range of possible EWS, hope we can both make it.

[wannabeCPA123]

careful…..

1231 assets are ” depreciable or real property held for one year and used in a trade or business”

It has to satisfy ALL three conditions (depreciable or real, held for one year and used in trade or business)

I didn't see anyone mention the one year requirement.

1231 are the assets defined collectively and also 1231 defines the long term gain over the original FMV.

1245-equipent sale = ordinary income ( greater of gain over AB or depreciation taken)

1231- long term gain is anything over the original FMV.

1250 – the name for real property.

FAR 78
REG 87
BEC 78
AUD 78
Passed all exams on first try! Good luck to everyone!

[Whopper Warrior]

@wannabe – you are correct that it is meant to be held over a year, if it was not; it would all be ordinary

I also realized I committed a cardinal sin. Land is not always a 1231 asset if you are a dealer in land. Should of used the word generally.

Inventory =/= 1231

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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