1250 Gains on Real Property Sales
by Kurt Trimarchi, CPA and David Huffman, CPA


So you are contemplating the sale of your business or investment real estate which you have held for a few years.  

Most likely there has been a significant amount of appreciation in the value of the property. Structuring the sale and calculating the tax impact of the sale can be complex. Current tax code allows for a portion of the gain to be taxed at preferential capital gain rates if the property was held in excess of one year; however, the tax law is complex when sorting through the various classes of taxable gain and related tax rates.  

When real property is sold, the total proceeds of the sale must be allocated among the real estate sold (referred to as Section 1250 property) and other non-real estate property included in the sale (i.e. land, equipment, furniture, etc.) based on the relative fair market values of each component. The sale of the real estate portion is taxed at a maximum rate of 25% for the gain attributable to prior straight line depreciation previously deducted by the business. Any additional gain in excess of the straight line depreciation is taxed at a maximum rate of 15% for gains recognized after May 5, 2003 and 20% for gains recognized before May 6, 2003. Any gain attributable to the sale of land is taxed at the maximum 15%/20% rates noted above. Gains from the sale of furniture and equipment are taxed at a variety of rates from 15% to a maximum of 35% based upon the specific facts of the sale.  

The following example illustrates the tax treatment for the sale of a business property:  

On December 31, 2003, Bob sold a commercial building that he has owned for many years. His original cost basis in the building was $1,000,000 and he has taken straight-line depreciation deductions of $500,000, leaving an adjusted basis of $500,000. His basis in the land is $250,000. The sales price of the property was $2,000,000, of which $1,500,000 was allocable to the building and $500,000 to the land.  

Of the $1,000,000 gain attributable to the building, $500,000 is taxed at a maximum rate of 25% related to the straight line depreciation and the remaining $500,000 gain is taxed at the maximum capital gain rate of 15%. The $250,000 gain attributable to the land is taxed at the maximum 15% capital gain rate.  

In certain cases, real estate is sold through an installment sale whereby the purchaser of the property pays the seller over a specified number of periods. The gain related to the sale is calculated using the same method as previously described; however, the gain is taxed over the periods of repayment. If the previous example was structured as an installment sale, 62.5% ($1,250,000 / $2,000,000) of the sale proceeds received in any given period is reported as gain. The tax code requires that the gains related to the sale of real estate which is taxed at 25% be reported in the initial periods until the 25% taxable gain is exhausted. Subsequently, any remaining capital gain is taxed at the 15%/20% tax rate until all sales proceeds are received.  

The calculation of the tax related to the sale of a business property can be quite complex and in certain cases dependent upon the allocation of the sales proceeds to the assets sold. Consulting with competent tax advisors would be prudent if you have recently sold or are considering the sale of business or investment real estate property.  

Mr. Kurt Trimarchi has more than ten years of broad domestic and international tax experience. He has extensive experience serving manufacturing and distribution clients and bringing tax value ideas and strategies to McKonly & Asbury LLP, where he is currently the Director of Tax Services.  

Mr. David Huffman joined McKonly & Asbury LLP last year as a Supervisor. He served with a local accounting firm as an audit supervisor and graduated from Messiah College with a Bachelor of Science in Accounting.

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