Section 1250 and unrecaptured gain

Your section 1250 property is depreciable real property other than section 1245 property. The statutory definition covers real property that is or has been property of a character subject to the depreciation allowance under section 167. It specifically excludes section 1245 property as defined in section 1245(a)(3).

For your section 1250 property, ordinary income recapture generally applies if you used an accelerated depreciation method. It also generally applies if you claimed any special depreciation allowance or the commercial revitalization deduction. These are the circumstances identified in the Form 4797 instructions.

When you classify your property, the section 1245 exclusion is part of the definition. You also consider whether your real estate formerly qualified for depreciation under section 167. Your classification therefore uses a definition that includes both present and past depreciable character.

When you dispose of section 1250 real property held more than a year, the recapture rules tax certain gain as ordinary income. This applies to the extent your gain is due to previously claimed depreciation exceeding straight line depreciation. That recaptured amount receives ordinary income treatment rather than capital gain treatment.

For property you held more than one year, additional depreciation means depreciation adjustments exceeding the adjustments that would have resulted under the straight line method for each taxable year. For property outside that holding period exception, the statutory definition of additional depreciation means the depreciation adjustments for the property.

Your unrecaptured section 1250 gain belongs to the capital gain calculation. Generally, it is the part of your capital gain from selling section 1250 real property that is due to depreciation. You generally cap this depreciation portion at your section 1231 net gain before subtracting a net loss from the 28% group.

The statutory definition of your unrecaptured section 1250 gain begins with qualifying long term capital gain not otherwise treated as ordinary income, excluding your net section 1231 gain to the extent it is ordinary income because of nonrecaptured net section 1231 losses from your five preceding tax years. It asks what would be ordinary income if section 1250 included all depreciation and the applicable percentage were 100%. The definition also includes a reduction and a net section 1231 gain limitation.

You first classify your gains and losses as ordinary or capital. You next separate the capital category by holding period into short term and long term results. If you have long term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify any unrecaptured section 1250 gain.

Generally, your capital gain or loss is long term if you held the asset for more than one year before disposing of it, but beginning in 2018 certain gains involving applicable partnership interests require a holding period of more than three years for long term treatment. You generally put an asset's capital result in the short term category when ownership lasted no longer than a year. This holding period classification is part of determining your net capital gain or loss.

Your unrecaptured section 1250 calculation also takes account of the net section 1231 gain limit and any net loss in the 28% group. You calculate this portion with the Schedule D instructions' worksheet titled Unrecaptured Section 1250 Gain Worksheet. The approved rule directs you to chapter 3 of Publication 544 for more information about section 1250 property and section 1231 gain.

If you have a net capital gain, section 1 provides a tax limitation calculated through several components. Its unrecaptured section 1250 component uses 25%. The amount entering that component is subject to a net capital gain limit and a further adjustment involving your taxable income.

For this component, you begin with your unrecaptured section 1250 gain or, if less, your net capital gain determined without regard to section 1(h)(11). You reduce that amount by the excess, if any, of the amount taxed under section 1(h)(1)(A) plus your net capital gain over your taxable income. The 25% component applies to the excess, if any, remaining after that reduction.

If you receive unrecaptured section 1250 gain through a fund distribution, Box 2b of Form 1099 DIV identifies that subcategory. The approved distribution fact states that this gain is taxed at a maximum of 25%. Your Form 1099 DIV and fund statements identify subcategories that can receive different tax treatment.

If you report your property sale under the installment method, any depreciation recapture under section 1245 or section 1250 is taxable as ordinary income in the year of sale. You recognize that recapture even if you receive no payments that year. If your gain exceeds the depreciation recapture income, you report the remaining gain under the installment method rules.

In the Schedule D installment calculation, you reduce the amount figured in Step 1 by any section 1250 ordinary income recapture for your sale. The recapture amount comes from line 26g of your 2025 Form 4797 or the comparable line for the year of sale. The result is your total unrecaptured section 1250 gain to allocate to installment payments.

Generally, you treat the capital gain on each installment payment as unrecaptured section 1250 gain until the total figured in Step 2 has been used in full. For payments you received in 2025, the amount is the smaller of the applicable amount on line 26 or line 37 of your 2025 Form 6252, or your unrecaptured section 1250 gain remaining to be reported.

When you sell trade or business property, the allocation generally covers all profit included in successive installments until you exhaust the unrecaptured section 1250 total calculated at Step 2. For your 2025 receipts, compare the applicable entry from Form 6252, line 26 or 37, against the unreported balance of that total and take whichever is lower.

If your installment sale gain qualifies for long term capital gain treatment in the year of sale, it continues to qualify in later tax years. You qualify for that holding period treatment by owning the property longer than a year before selling.

When you apply the home sale gain exclusion, you cannot exclude gain from depreciation adjustments attributable to periods after May 6, 1997. You must also adjust your basis for depreciation deducted in earlier years.

You do not count that depreciation adjustment gain when determining the amount of gain allocated to business or rental use. The approved home sale rule separately requires the basis adjustment and denies the exclusion for gain from depreciation adjustments attributable to periods after the cutoff.

You generally apply two constraints to the depreciation portion of your capital profit: a ceiling equal to section 1231 net gain and a subtraction for a net loss within the 28% group. Those limits are part of the definition you apply through the Schedule D worksheet.

You can deduct capital losses up to your capital gains and, if you are a taxpayer other than a corporation, also deduct the lesser of $3,000 or your capital losses exceeding your capital gains. If you are married filing separately, the additional limit is $1,500. You may be able to use losses exceeding this limit in future years. The Schedule D line 21 instructions provide details.

You must report all your capital gains and losses even if you cannot use all your losses in 2025. The deduction limit and possible use of excess losses in future years do not remove that reporting requirement.