Disclaimer: I'm studying REG myself so I might be wrong.
If you have a BUSINESS asset that's DEPRECIABLE then it's a 1231 asset.
E.g. a company car (personal property) or a building (real property) are 1231 assets.
However, if you have a similar asset for PERSONAL USE, then it's a CAPITAL asset.
E.g. your own personal car or your own house would be a CAPITAL asset.
If you buy a 1231 asset (e.g. a building) and the next day the building value skyrockets, you'll get a capital gains tax. Ditto with the capital asset (e.g. a house).
HOWEVER, if you buy a 1231 asset (e.g. a building) and the next day the building value plummets, you can claim an ORDINARY LOSS. If you did that with your personal loss you would get a capital loss. Why? I don't really know, I guess because governments love businesses. Point is, if you're a BUSINESS you get the BEST OF BOTH WORLDS.
The one kink to remember is that nondepreciable property like land is a capital gains assets.
1245 and 1250 assets
I haven't remembered the rules for the 1250, but here's the big picture.
With your personal car or house, you can't take depreciation on it (deductible at the HIGH ordinary tax rate).
However, with a business asset, for years you can take depreciation on it, at the high ordinary rate.
Lets assume that the value of the asset stays flat. You bought a building for a million, 10 years later, it's still worth a million.
With a personal house, you wouldn't have a capital gain or loss.
With a business building, you would have a capital gain. The government's basically clawing back all that depreciation you took.
But that gain, unlike all the depreciation you took all that time, would be CAPITAL in nature. Although businesses don't get the special capital gains rate, let's just say that's a good thing.
So the 1245 and 1250 asset basically says, the government's going to claw back the depreciation you took, which was deductible as ORDINARY expenses, as an ORDINARY gain.
E.g. if you bought a building at a million, took half a million of depreciation, and sold it for a million, all of the gain would be ordinary (clawing back the depreciation).
But if you sold it for 1.1 million (an appreciation of 100K), then the half million that's depreciation would get clawed back as ordinary, and the 100K that actually does represent an increase in value, would get taxed as a capital gain.
Finally, if you sold it for 0.9 million (a real loss of value in 100K), unfortunately, the 400K gain would be all ordinary.
I guess the key take away is that:
1) BUSINESS assets that are depreciable (1231) get the BEST OF BOTH WORLDS. Gains are capital. Losses are ordinary.
2) But the government will CLAW BACK any gain that's solely due to depreciation. If you take ordinary deductions, the government's going to force you to take ordinary income.
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