Sale & Depreciation

[Absolut]

Client is a Fisherman. He sold a boat he bought for $33,068 in 07/01/00 (used 10 yr depreciation), he sold the boat on 3/3/05 for $30,000, he's only collected $5,000 on the sale, the other $25,000 will be paid over 5 years w/ no interest involved. I tried to link a 6252 to it, but it gave me an error message that said "This sale does not qualify for installmetn method b/c the gain does not exceed the income recapture computed on 4797, Part III. The gain is $18,247.00. Anyone have any ideas on what to do? So do I just leave the $30,000 and claim the whole $18,247.00 for a gain in 2005? Doesn't seem fair.

My next quesion is what is the maxium amount I can take on a section 179 for his new boat?

[jainen]

What's not fair?

>>Doesn't seem fair<<

What's not fair? He had a loss on the boat, so he can't use the installment method to defer capital gain because there is no capital gain. The only thing he is taxed on is the recapture of deductions he has already enjoyed for years.

[Armando Beaujolais]

Client is a Fisherman. He sold a boat he bought for $33,068 in 07/01/00 (used 10 yr depreciation), he sold the boat on 3/3/05 for $30,000, he's only collected $5,000 on the sale, the other $25,000 will be paid over 5 years w/ no interest involved. I tried to link a 6252 to it, but it gave me an error message that said "This sale does not qualify for installmetn method b/c the gain does not exceed the income recapture computed on 4797, Part III. The gain is $18,247.00. Anyone have any ideas on what to do? So do I just leave the $30,000 and claim the whole $18,247.00 for a gain in 2005? Doesn't seem fair.

My next quesion is what is the maxium amount I can take on a section 179 for his new boat?

See TTB page 6-13. "If property sold on the installment method is depreciable property subject to ordinary income recapture, all depreciation recaptured as ordinary income must be included in income in the year of sale, whether or not an installment payment is received in that year."

[Chief]

Recapture of Depreciation

Oh my goodness. I continually to learn on this Board. I have a client who is selling a rental house on the installment plan. What you are saying is that he must recapture the depreciation in the year of sale. He cannot spread it out like the principal and interest payments that he will be receiving. I recall that form 4562 calls for depreciation taken and allowable depreciation.

[Chief]

Armando

You are a smart cookie.

[Armando Beaujolais]

Oh my goodness. I continually to learn on this Board. I have a client who is selling a rental house on the installment plan. What you are saying is that he must recapture the depreciation in the year of sale. He cannot spread it out like the principal and interest payments that he will be receiving. I recall that form 4562 calls for depreciation taken and allowable depreciation.

It's not the same. The key is whether the depreciation is subject to recapture as ordinary income. The Author's Comment on page 6-13 of TTB says "Residential rental and nonresidential real property depreciated under MACRS are not subject to ordinary income recapture."

Also check out the chart on 6-11. Personal property is generally section 1245 property, where depreciation is subject to recapture as ordinary income. However, most real property is section 1250 property, where prior depreciation is called "unrecaptured section 1250 gain." The 1250 gain is treated as capital gain subject to a maximum CG rate of 25%.

Ordinary income recapture - report all in year of sale. Capital gain - can be reported on installment.

The boat in the original question is personal property. It's 1245, and depreciation is recaptured as ordinary income. That's why the depreciation recapture can't be reported on the installment method. Depreciation on real property, however, is usually not recaptured as ordinary income, it's capital gain, allowed on installments.

So with your rental property, assuming the building was depreciated under MACRS (straight-line), the depreciation on the building will be "unrecaptured section 1250 gain," taxed as capital gain, and allowed to be reported on the installment method. If you're depreciating personal property like appliances and furniture, that is section 1245 property, and that depreciation must be recaptured as ordinary income in the year of sale.

Here's an important point in all this. The term "recapture" only applies to gain attributable to depreciation that must be treated as "ordinary income."

You'll often hear people talk about "recapturing" section 1250 gain, but that's not technically correct. In this case semantics are crucial. If in the code or regs or pubs, etc., you see "recapture," they're always talking about ordinary income. Gain on real estate will not have any ordinary income, because it's always depreciated straight-line (except accelerated ACRS depreciation which is almost obsolete now in talking about these rules).

[Matt Sova]

True, but...

The Sec 1250 gain (recapture of depreciation) on a rental is recaptured first via the payments received on the installment. Therefore the first portion you receive will be taxed at 25% max.