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Q : I plan to sell 80 acres of farm ground that has a large hay barn. I was told the tax calculation on the sale is different for the barn and the land - is this correct?
A : The information you received is correct. Gain on the sale of Section 1250 property is subject to different tax rate on the depreciation that was taken on the barn. The gain is subject to your ordinary tax rate on any depreciation taken that is greater than the straight-line depreciation. Most Section 1250 assets are now depreciated using the straight-line method. Next, depreciation claimed (up to the amount of the gain) using straight-line is taxed at a maximum of 25%. This gain is described as “unrecaptured Section 1250 depreciation”.
Thus, while the gain on the sale of the land would be subject to the maximum long-term capital gain tax rate of 15%; the gain on the hay barn would be subject to your ordinary income tax rate and/or 25%.
Example: Hay barn cost $38,000 to build; depreciation taken was $28,000 ($3,000 of which was greater than the straight-line amount); and the hay barn was sold for $40,000 resulting in a gain of $30,000. Also we’ll assume you are in the 28% ordinary income tax rate bracket.
$3,000 recapture of excess depreciation taxed at 28% = $840
$25,000 straight-line deprecation (unrecaptured Section 1250 depreciation) taxed at 25% = $6,250
$2,000 gain above recapture amounts taxed at 15% = $300
Information provided by:
Parman R. Green,
Ag Business Management Specialist
111 N. Mason
Carrollton, MO 64633
Date reviewed: April 2001