A basic definition of “unrecaptured section 1250 gain” is necessary to be able to determine if unrecaptured section 1250 gain is subject to the §751 hot asset rules. Very generally, §1(h)(6) defines the term unrecaptured section 1250 gain as gain recognized upon the sale of real property that has been held for more than 12 months to the extent of straight-line depreciation previously deducted by the taxpayer. Code §1(h)(1)(E) requires the taxpayer to apply a 25% tax rate for unrecaptured section 1250 gain.
Unrecaptured section 1250 gain is not considered a §751 hot asset because it fails to meet the statutory definitions to be classified as an “inventory item” or an “unrealized receivable.” Although the definition of an inventory item is broadly defined in §751(d), it does not apply to property that is a capital asset or property described in §1231. Because unrecaptured section 1250 gain arises from the sale of a capital asset or a §1231 asset, it does not fall under the definition of an inventory item.
Additionally, unrecaptured section 1250 gain does not meet the §751(c) definition of an unrealized receivable because the unrecaptured section 1250 gain is not ordinary income (it is capital gain taxed at a 25% tax rate set by statute). More specifically, §751(c) states:
For purposes of this section [§751] and sections 731, 732, and 741 (but not for purposes of section 736), such term also includes … section 1250 property (as defined in section 1250(c) [any real property subject to depreciation under §167]), … but only to the extent of the amount which would be treated as gain to which section … 1250(a) [ordinary income] … would apply if (at the time of the transaction described in this section or section 731, 732, or 741, as the case may be) such property had been sold by the partnership at its fair market value. (Emphasis added.)