What is unrecaptured section 1250 gain?

Unrecaptured section 1250 gain is a tax term used by the Internal Revenue Service (IRS) to refer to a type of capital gain realized from the sale of depreciable real estate property. This gain is taxable at a rate of 25% and is considered to be "unrecaptured" because it represents depreciation that has been claimed on the property but not taxed in previous years.

Section 1250 of the U.S. tax code defines these capital gains as: "amounts received as a result of the sale, exchange, or involuntary conversion of certain depreciable real property, including buildings, and any section 1250 property as defined in the Internal Revenue Code."

The term "unrecaptured" refers to the fact that the tax on the depreciation claimed on the property by the owner has not yet been recaptured or collected by the IRS. Essentially, the amount of the unrecaptured section 1250 gain is the difference between the gain realized from the sale of the property and the amount of depreciation claimed on the property by the owner.

For example, if a taxpayer sells a rental property they have owned for 10 years, they may receive a capital gain from the sale. However, if they have claimed depreciation on the property during this time, a portion of that gain may be classified as unrecaptured section 1250 gain and taxed at a higher rate of 25%.

It is important to note that unrecaptured section 1250 gain only applies to real estate assets that have been depreciated for tax purposes. It does not apply to other types of assets or investments.