Property Transactions

Property transactions - 1

TAX 5015

Review of Property Transactions updated: January 6, 2010

Topic: Page

I. An overview of cost recovery (depreciation) 1

II. Modified accelerated cost recovery system (MACRS) 3

III. The Sec. 179 election – a current deduction for a capital expenditure 6

IV. Two additional rules (limitations) for listed property 8

V. Additional first-year depreciation (30% and 50% "bonus" depreciation) 10

VI. Amortization of intangibles (including Sec. 197 intangibles) 12

VII. Disposal of property (sales, exchanges, casualties, condemnations,

thefts, retirement of bonds) – common questions include:

(1) What is the realized gain or loss?

(2) What is the recognized gain or loss (the amount reported on tax

return)?

(3) What is the character of the gain or loss – ordinary or capital?

13

VIII. Review of Sec. 1231 – disposal of business property 16

IX. The Sec. 1245 recapture rules – full recapture 18

X. The Sec. 1250 recapture rules – partial recapture 19

XI. Additional recapture for corporations – Sec. 291 21

XII. Other recapture provisions 21

Property transactions - 2

I. An Overview of Cost Recovery (Depreciation):

A. The evolution of depreciation in the tax code

1. pre-ACRS (before 1981) – traditional financial accounting methods

a. straight line

b. sum-of-the-years'-digits

c. declining balance family (150, 175%, and 200%)

Note: Both b & c are accelerated depreciation methods.

2. Accelerated Cost Recovery System – ACRS (introduced in the

Economic Recovery Tax Act of 1981)

a. reasons for the ERTA – economic problems in the late 1970s –

high inflation, high unemployment, and no growth

b. among President Reagan's solutions – cut tax rates (both

individual & corporate), introduced new depreciation system

(ACRS) that used much shorter asset lives which produced more

rapid cost recovery deductions (and tax savings)

3. Modified Accelerated Cost Recovery System – MACRS (introduced in

the Tax Reform Act of 1986)

a. reasons for the TRA – budget deficits in the early 1980s

b. the tax bill resulted in longer asset lives, which produced

somewhat slower cost recovery deductions

Note: There are currently three separate cost recovery systems in place –

the method depends on when the property is placed in service. MACRS

applies to all property placed in service since January 1, 1987.

B. The amount of depreciation depends on when the property is "placed in

service" and the "type of property" (see IRS Publication 946)