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  • Terri Huggins – The Balance

    Highlights

    • More than 10 years of experience as a journalist covering topics like personal finance, parents, and mental health
    • Former marketing and communications professional at a real estate company
    • Host of local workshops discussing financial and contractual advice for freelance professionals
    • Has writing expertise focused on the intersection of personal finance, race, and culture

    experience

    Terri Huggins is an award-winning journalist with more than 10 years of professional experience writing about personal finance, parenting, and emotional well-being. Within her work, Terri focuses on the intersection of those topics with race and culture. Terri was first introduced to personal finance management while working at a real estate office. After that experience, she started a blog focused on running a side hustle, student debt repayment, and money management. Terri has since written for a variety of publications including The New York Times, Washington Post, Real Simple, Huffington Post, and more. In addition to her writing work, Terri is a frequent public speaker and fitness instructor.

    Education

    Terri Huggins has a Bachelor of Arts in Communication and Journalism from Rider University.

    About The Balance

    The Balance, a Dotdash Meredith brand, makes money easy to understand. We give people tools they need to not only make smart financial decisions but also prepare for the experiences they will have along the way. Our team of expert writers and editors have extensive qualifications in the topics they cover, and many of them have MBAs, PhDs, CFPs, and other advanced degrees and professional certifications. We require our writers to use primary sources in their articles, which are also approved by our Financial Review Board and fact-checked. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  • What Is an Unrecaptured Section 1250 Gain?

    Key Takeaways

    • A higher unrecaptured Section 1250 tax rate applies to long-term capital gains for which a taxpayer has previously claimed depreciation.
    • The IRC requires that claimed depreciation must be factored back in to arrive at an adjusted cost basis for calculating the amount of a capital gain.
    • The Section 1250 rate is usually 20%, compared to the 15% long-term capital gains rate that applies for most taxpayers when the asset has not been depreciated for tax purposes.
    • A Section 1250 adjusted cost basis can be offset by capital losses.

    Definition and Example of an Unrecaptured Section 1250 Gain

    Section 1250 of the Internal Revenue Code (IRC) kicks in when you sell a Section 1231 real estate asset for financial gain after claiming a depreciation tax break for it in previous years. The IRS says the gain is taxable at a pretty significant rate—higher than those for most long-term capital gains.

    Section 1231 property is typically business or trade real estate, so unrecaptured Section 1250 gains usually only come into play for non-business owners if they have rental property.

    note

    A capital asset becomes an IRC Section 1231 asset if it’s depreciable and you own it for more than one year before you sell or otherwise dispose of it.

    Let’s say you purchased a rental property for $200,000 in 2020. You’re entitled to depreciate it over five years. That works out to $40,000 per year: $200,000 divided by five. You claim $80,000 in depreciation in 2020 and 2021. This brings your cost basis down to $120,000 ($200,000 minus $80,000) in claimed depreciation.

    You sell the property for $250,000 in 2022. Under Section 1250 rules, you’ve realized a gain of $130,000 ($250,000 minus your $120,000 basis adjusted for depreciation), not $50,000 ($250,000 minus your $200,000 purchase price). The $80,000 you claimed as depreciation is recaptured and taxed at a maximum of 25%. Only the remaining $50,000 is taxed at the most favorable long-term capital gains tax rate of just 15%.

    How an Unrecaptured Section 1250 Gain Works

    Section 1250 tags the gain you get from selling property as “unrecaptured” when the sales price exceeds your initial cost basis in the asset, which is the total of what you paid for it and spent on maintaining it. It adjusts this basis by adding back the depreciation you claimed.

    An unrecaptured Section 1250 gain effectively prevents you from taking a double-dip tax break. It changes the rate at which realized gains are taxed with the intention of offsetting that depreciation you claimed. It prohibits you from claiming advantageous long-term capital gains rates on the entirety of your profit.

    But “offset” is the key word here in another respect. The IRC allows you to offset Section 1250 gains with Section 1231 capital losses, provided both assets were held for more than a year so both your loss and your gain are long term. This means you can subtract your loss from the amount of your gain, and pay tax on the difference.

    note

    A capital loss occurs when you sell an asset for less than your initial cost basis. This would be the case if you sold a $200,000 property for $175,000. You’d have a $25,000 loss, assuming you claimed no depreciation so you didn’t have to add it back in and adjust your cost basis.

    How To Report Uncaptured Section 1250 Gains

    You report uncaptured Section 1250 earnings on Form 4797, then transfer that total to Schedule D. The instructions for Schedule D include detailed explanations and worksheets to help you make your calculations. Enter the resulting tax amount on line 16 of your Form 1040 tax return.

    How Much Are Taxes on Unrecaptured Section 1250 Gains?

    The tax on unrecaptured Section 1250 gains tops out at 25%, which is considerably higher than two of the three tax rates for long-term capital gains, which ranges from 0% to 20%, depending on your income. Most taxpayers pay a 0% or 15% rate on long-term capital gains, which is at least 10% less than the unrecaptured Section 1250 rate.

    The 25% rate applies to money received in the first through fourth years if you accepted installment payments after 1999. Some gains can be taxed at 20% after the first four years, but this is still higher than the long-term capital gains tax rate for most taxpayers.

  • Alternatives to a Home Equity Loan

    A home equity loan, or second mortgage, allows you to withdraw the equity you’ve built up in your home so you can use the cash to make repairs to your home, pay for college tuition, or consolidate your debt, for example.

    You repay the money over time through a series of regular payments. Home equity loans have a number of benefits, but there are some downsides to consider as well. If you’re not sure if a home equity loan is right for you, you can weigh the pros and cons of alternatives such as lines of credit, refinancing, or personal loans.

    Key Takeaways

    • Home equity loans use your home as collateral, which brings a risk that the lender could take your property.
    • With a home equity loan, you will take on a second monthly payment, which can impact your budget.
    • Alternative to using a home equity loan include a HELOC, a cash-out refinance, or a personal loan.

    Downsides of Using a Home Equity Loan

    While many homeowners appreciate the flexibility home equity loans offer, there are some drawbacks to this type of financing. Among the downsides is the fact that your home secures these loans. So if you can no longer afford to make the payments—for example, if you lose your job—you could lose your house.

    In addition, this type of loan adds a payment to your budget each month. If your cash flow is tight and you’re using the money for expenses other than consolidating your bills, a second mortgage might not be a good fit.

    Having a home equity may also limit your ability to refinance your primary mortgage. So if you want to refinance for better terms on your original mortgage, you may want to delay taking on a home equity loan. Consult your lender or a financial advisor for guidance on your specific situation.

    If you’re not sure if a home equity loan is right for you, consider the pros and cons of the following alternatives.

    Home Equity Line of Credit (HELOC)

    A home equity line of credit, or HELOC, is another type of second mortgage. It’s similar to a home equity loan because you’re accessing the equity built up in your home. But unlike with a regular loan, a HELOC works more like a credit card with a revolving line of credit.

    You’re approved for a certain amount of money. You then can access those funds anytime you need them during the loan’s draw period. During this time, you only pay interest on the money you’ve used.

    HELOCs usually have variable interest rates. So among the downsides of these loans, your payments won’t be the same each month, which means you won’t have predictable monthly payments.

    Once the draw period is over, you’ll need to start repaying the principal, which means your payments will be larger. In some cases, a lender may require a balloon payment, or payment in full, although most HELOCs provide repayment periods of about 10 to 20 years.

    If you can’t afford the higher payment, your bank may allow you to refinance your HELOC.

    Cash Out Refinance

    A cash-out refinance is another option for tapping equity in your home. This type of loan is when you take out a new primary mortgage for more than the amount you currently owe. As with a home equity loan, you get this extra money in a lump sum of cash, and you can spend the funds any way you’d like.

    With a cash-out refinance, you won’t add a second payment each month. You can get a cash-out refinance that doesn’t add to the amount of your monthly payments. However, you’ll extend the length of the loan. Also, since a cash-out refinance is a primary mortgage, you’ll usually qualify for better interest rates.

    Furthermore, lenders may not require as high a credit score to approve you for a cash-out refinance compared to a home equity loan. So if you don’t have great credit, this could be a good alternative.

    Keep in mind that whenever you refinance, you have to pay closing costs. If you don’t have a lot of money up front, taking out a home equity loan might make more sense.

    Reverse Mortgage

    If you’re at least 62, you may be eligible for a reverse mortgage. This type of loan lets you use your home equity to supplement your income in retirement.

    You’re not required to make any payments with a reverse mortgage as long as you live in the home. These terms can save you money right now. The loan is due when the last borrower dies or moves out of the house. At that point, you or your heirs can sell the home to pay off the loan. If the sale price isn’t enough, you or your estate is responsible for making up the difference.

    Reverse mortgages do have some drawbacks, such as high fees. You may need to pay for origination costs, mortgage insurance, and closing costs. Due to these limitations, a reverse mortgage may not make financial sense for everyone. Consider consulting a financial advisor about options for your situation.

    Personal Loans

    A personal loan is another home equity loan alternative. With this type of loan, you can borrow money and use it for any purpose. Unlike a home equity loan, you don’t have to use your home as collateral.

    There are two main types of personal loans: secured and unsecured.

    Secured Personal Loans

    A secured personal loan uses your assets as collateral. If you can’t repay the loan, the lender can take the money from your account to cover the cost. Because there’s less risk for the lender, you may be able to get a lower interest rate.

    You can use many different assets as collateral, including your home, but you can use other assets besides your home to back a secured personal loan. You can use, for example, a savings account, a stock portfolio, or even your vehicle.

    Unsecured Personal Loans

    An unsecured personal loan doesn’t require collateral. However, that means there’s more risk for the lender since they could lose money if you can’t repay the loan. As a result, it’s difficult to qualify for these loans.

    You may need good or excellent credit to get approved for an unsecured personal loan. And even with excellent credit, you’re likely to still pay a higher interest rate compared to a secured loan or a home equity loan.

    Credit Cards

    Credit cards can be other alternatives to home equity loans. However, use them carefully because they generally have higher interest rates.

    You could finance a project with your credit card and pay it off over time. Some credit cards offer a 0% APR promotional period in which you won’t accrue interest on your purchases until the promotional period expires. If you can pay it down before the 0% APR period ends, you essentially get a free loan. However, after that period, interest is applied to your remaining balance.

    Read the fine print carefully because some carry a penalty APR as well as other potential fees or penalties.

    Other Asset-Backed Loans

    Other collateral loans may be a good fit for your financial situation. Here are three types to consider.

    401(k) Loans

    If you have a retirement 401(k) account, which is an employer-sponsored account, you may be able to borrow money from it. With this type of loan, you can borrow up to $50,000 or half of your account balance, which is always less. However, the loan typically must be repaid within five years.

    One significant downside of a 401(k) loan is that you’re borrowing from future retirement funds.

    Car Title Loan

    A car title loan can provide cash in an emergency. However, these short-term loans, which often last for only 30 days, have very high interest rates.

    You’ll give the title to your vehicle to the lender until the loan is repaid. If you can’t pay back your loan on time, you’ll pay a large fee and could potentially lose your car.

    CD Loan

    You can use just about any personal property as collateral for a loan, including the value in a certificate of deposit (CD). In a financial emergency, this type of loan allows you to access the money in your CD without paying an early withdrawal penalty. Check with your bank regarding other potential fees.

    How Much Equity Do You Need for a Home Equity Loan?

    Although lending requirements vary, you’ll typically need at least 15% to 20% equity to qualify for a home equity loan. Of that amount, you can typically take out 80% to 85% as cash.

    How Long Does It Take to Get a Home Equity Loan?

    There’s quite a bit of paperwork involved when you apply for a home equity loan. The process can take about 45 days, although some lenders might be a bit faster or slower.

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  • Gas Prices Break New Record After Brief Reprieve

    US gas prices reached a new record high Tuesday, erasing the modest relief seen in April.

    Higher oil prices and increasing demand for gas pushed the average national price to $4.37 a gallon, according to data from AAA. As the chart below shows, the average has now surpassed the previous high of $4.33—fallout from Russia’s invasion of Ukraine.


    The price of crude oil, which accounts for more than half the price at the gas pump, reached almost $110 a barrel last week after falling below $100 in late April. (As of Tuesday, it was back down around $100.) Those increases as well as rising demand and lower supplies of gas have been pressing pump prices higher, AAA said.

    The national average for gas was $3.54 a gallon when Russia invaded Ukraine on Feb. 24. Sanctions against Russia proceeded to take as much as 3 million barrels of Russian oil off the market per day, increasing international oil demand and pushing prices higher. After the White House released oil saved in strategic reserves in late March, prices began to drop, but the downward trajectory was short-lived.

    note

    The recent trajectory for diesel fuel, also made from oil, is even worse. Diesel, which powers the economy by fueling the trucks, ships, and plans that transport much of the country’s goods, has been breaking new records daily and hit $5.55 a gallon on Tuesday.

    Have a question, comment, or story to share? You can reach Terry at tlane@thebalance.com.

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