Ordinary Recapture - 1245

[Eric Williams]

So I always hear people talk about cost segs and bonus but no one mentions the ordinary recapture component.

The IRS doesn't like people taking ordinary deductions one year, then selling an item, and getting all capital gain later.

So they created recapture, to match up amounts. This overall function of recapture on 1245 is to ensure that any gain that receives capital gains rates is from APPRECIATION, not depreciation.

They do this by bifurcating the gain. Basically the gain minus previous depreciation, is the gain from appreciation.

The depreciation is given ordinary income treatment at the relevant marginal rate. 

You also have 1250 recapture as well for the 1250 property. Then you get capital gain.

So consider how long you are going to hold the property before cost segging, and consider that bonus is class by class. I don't have to bonus every class. It might be smart to mix some bonus with some straight line and DDB.

But know those ordinary deductions will later have ordinary income and potentially lead to a lower capital gain. And know they come all at once, so you might be in a higher bracket with more ordinary income.