When Jennifer sold her residential rental property, what is the character of the gain?

• A. $0 unrecaptured Section 1250 income, $700,000 "regular" long-term capital gain
• B. Unrecaptured Section 1250 income of $700,000, $90,000 "regular" long-term capital gain
• C. $90,000 unrecaptured Section 1250 income, $700,000 "regular" long-term capital gain
• D. $90,000 recaptured Section 121 gain and $700,000 unrecaptured Section 1250 gain

Answer: (C)

When a residential rental property is sold, the characterization of the gain depends on the depreciation taken on the property and the duration of ownership. In the case of Jennifer's sale, the characterization specifies unrecaptured Section 1250 income and long-term capital gain.

Unrecaptured Section 1250 income relates to the portion of gain attributable to depreciation deductions taken on real property. This was likely a significant aspect of Jennifer's situation due to rental activity, which typically includes depreciation that can be recaptured upon the sale of the property.

The correct answer identifies $90,000 as the unrecaptured Section 1250 income. This amount represents the portion of the gain that is subjected to specific tax treatment, which is taxed at a maximum rate of 25%. The remaining $700,000 reflects the "regular" long-term capital gain. Long-term capital gain arises when the property has been held for more than one year, and it is generally taxed at lower rates compared to ordinary income.

This answer accurately reflects how gains from the sale of a residential rental property are segmented based on the nature of the income. In this case, the combination of unrecaptured income and long-term capital gain adds clarity to Jennifer's tax implications from the sale