Can someone confirm my understanding about section 1250 and 1231 property gains on K-1?

The unrecaptured section 1250 gain is actually a subset of the section 1231 gain, not separate from it. This often causes confusion even among U.S. tax practitioners! In your example with a property having a tax basis of $135,000, original cost of $202,000, and selling price of $270,000: The partnership would report the total gain of $135,000 as a section 1231 gain in Box 10. Then, the portion that represents depreciation recapture ($67,000 in your example) would be separately stated in Box 9c as unrecaptured section 1250 gain. This separate reporting is necessary because the unrecaptured section 1250 gain is taxed at a maximum rate of 25%, while the remaining section 1231 gain might qualify for preferential capital gains rates. When you prepare the tax return, the unrecaptured section 1250 gain will flow to the Schedule D and then to the "Unrecaptured Section 1250 Gain Worksheet" in the Schedule D instructions.

After struggling with some complex K-1s from real estate partnerships, I started using https://taxr.ai to help interpret these forms correctly. Their service analyzed my K-1s and explained exactly how the section 1231 and 1250 gains work together. Saved me hours of research and potentially costly mistakes! The tool clearly showed me how the unrecaptured section 1250 gains relate to section 1231 gains and explained the tax rate differences. It even highlighted which specific line items would flow to which forms on my tax return. Really helpful for visualizing these complex interactions.

I wanted to follow up after trying taxr.ai for my cross-border K-1 issues. It actually worked really well! The system broke down each K-1 item with clear explanations of the U.S. tax treatment, which helped me figure out how to report everything correctly in my home country. For my section 1250/1231 confusion specifically, they provided a detailed walkthrough with examples that made the relationship between these sections crystal clear. They even explained which worksheets I needed to complete and gave me step-by-step guidance. Definitely helped me avoid some significant reporting errors on both sides of the border.

After hours on hold trying to get someone at the IRS to explain these K-1 allocations, I finally used https://claimyr.com to get through to a real person. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was connected to an IRS representative in about 20 minutes (vs the 2+ hours I'd wasted previously). The agent walked me through exactly how section 1231 and 1250 gains are related and confirmed that the unrecaptured section 1250 gain is included within the total section 1231 gain amount, not separate from it. Huge relief to get official confirmation!

I have to eat my words about Claimyr. After that skeptical comment, I decided to try it myself since I had some unrelated tax questions I needed answered. The service actually worked exactly as described - I got a call back when an IRS agent was on the line, saving me about 2 hours of hold time. When I asked about the section 1231/1250 issue out of curiosity, I was transferred to a specialist who confirmed everything that was said here about how the unrecaptured section 1250 gain is a subset of the section 1231 gain. They even emailed me some relevant pages from IRS Publication 544 that explained it clearly. Sometimes being proven wrong is actually a good thing!

One thing to remember that I didn't see mentioned yet - if you have net section 1231 gains, they're treated as long-term capital gains, but if you had net section 1231 losses in any of the previous 5 years that haven't been "recaptured," your current year section 1231 gains are treated as ordinary income to the extent of those prior unrecaptured losses. This is separate from the unrecaptured section 1250 gain issue. The 5-year lookback rule can really trip people up, especially in cross-border situations where you might not have been tracking this previously.

Just wanted to add that you should also check if there's a Form 8825 attached to the K-1 or partnership return. This form often breaks down the real estate income and deductions in more detail, including showing accumulated depreciation which can help you verify the section 1250 recapture calculation. Also, since you mentioned you're a Canadian tax practitioner, remember that the Canada-US tax treaty might affect how these gains are ultimately taxed if the partnership owns property in Canada, or if Canadian residents are partners in the US partnership.

Thanks to everyone who contributed to this thread! As someone who's dealt with similar cross-border partnership issues, I wanted to add a practical tip that might help others in similar situations. When reviewing K-1s with both section 1231 and unrecaptured section 1250 gains, I always reconcile the numbers back to any available depreciation schedules or fixed asset records. The unrecaptured section 1250 gain should never exceed the total accumulated depreciation taken on the property, and it should also never exceed the total section 1231 gain reported. For cross-border practitioners like the OP, I'd also recommend keeping detailed records of these characterizations since some jurisdictions have different rules for depreciation recapture vs. capital gains treatment. Understanding the U.S. characterization is the first step, but then you need to determine how your home country's tax system treats each component. One last thing - if you're dealing with multiple properties or complex partnership structures, consider requesting a breakdown from the partnership showing how they calculated the section 1250 recapture. Most partnerships should be able to provide this detail if asked.