Section 1250

Section 1250

A section of the Internal Revenue Code that the IRS uses to maximize tax revenue from depreciating assets by requiring the profit on the sale of a depreciating asset to be reported as ordinary income rather than capital gain. Because capital gains are taxed at a lower rate than most ordinary income, the IRS uses Section 1250 to make up for some of the tax revenue lost in the depreciating asset. This is called recapture of depreciation; it is assessed if the assets are sold for a price higher than their depreciated value. For example, suppose one buys a computer for $700 and, after a year, it depreciates to $600. If one then sells the computer for $650, one has recaptured $50 worth of depreciation. This $50 is taxed as ordinary income.

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Section 1250

When real property is sold, gain must be recaptured as ordinary income to the extent of the depreciation claimed in excess of straight line. Section 1250 is the section of the Internal Revenue Code that requires this treatment. Also see "Recapture of Depreciation."