Need help on rental sale

[PIGLEE]

Maribeth provides some of the best advice ever on this forum. Glad to see this thread and will be printing it out for my research file.

Thanks to all who contributed.

I agree, and you give very good advise also. Isn't it nice together, that together we are all one great time, supporting each other. I also have printed this thread to my research file.

Thanks every one!!!!!!

[taxxcpa]

Installment sale

Roland got it right. Also, TaxMom34 is correct in that the 1250 unrecaptured gain is taxed in full the first year even if no payments are received in that tax year on an installment gain.

Is this correct? If you received only $ 1000 in principal payments but had taken $ 10000 depreciation, would you owe tax on $10,000 plus the profit percent of the other $ 1000?

[Gretel]

Amen. It was a big help for me also getting such a great explanation. I don't encounter this issue often and, hence, struggle every time to understand the basics and the rules. Thank you, everyone.

[Maribeth]

With §1250 property, the gain attibutable to depreciation is recognized first through an installment sale, as the payments are made.

With §1245 property, the gain attributable to depreciation is all ordinary income and taxed in the year of sale. You cannot report this part of the sale using the installment method.

Maribeth

[BHoffman]

Is this correct? If you received only $ 1000 in principal payments but had taken $ 10000 depreciation, would you owe tax on $10,000 plus the profit percent of the other $ 1000?

I agree with Maribeth.

"§1.453-12 Allocation of unrecaptured section 1250 gain reported on the installment method.

(a) General rule. Unrecaptured section 1250 gain, as defined in section 1(h)(7), is reported on the installment method if that method otherwise applies under section 453 or 453A and the corresponding regulations. If gain from an installment sale includes unrecaptured section 1250 gain and adjusted net capital gain (as defined in section 1(h)(4)), the unrecaptured section 1250 gain is taken into account before the adjusted net capital gain."

I understand this to mean that the entire 1250 gain is not taxed in the first year.

I understand this to mean that the portion of the payment received that is attributable to Sec 1250 is recognized and taxed at that rate first, before any other capital gain.

[Burke]

Okay, I am willing to investigate further, but my statement was based on the following in Pub 537, page 6, under Depreciation Recapture Income, which states "If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received in that year." Also .....the gain equal to the recapture income is reported in full in the year of sale. Only the gain greater than the recapture income is reported on the installment method." Also, I was basing that on personal experience, in which a sale of a commercial property paid for over 3 years, where the entire gain attributable to depreciation was reported in the first year, not pro-rated over the period of payments received. This is how the software calculated it, and involved my doing some subsequent research to determine if that was correct.

[Maribeth]

Okay, I am willing to investigate further, but my statement was based on the following in Pub 537, page 6, under Depreciation Recapture Income, which states "If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received in that year." Also .....the gain equal to the recapture income is reported in full in the year of sale. Only the gain greater than the recapture income is reported on the installment method." Also, I was basing that on personal experience, in which a sale of a commercial property paid for over 3 years, where the entire gain attributable to depreciation was reported in the first year, not spread over the period of payments received. This is how the software calculated it, and involved my doing some subsequent research to determin if that was correct.

But . . . . . . there is no "depreciation recapture" on the sale of property subject ot §1250. (there used to be, but that was before MACRS). There is unrecaptured §1250 gain. That gain is recognized first on the installment method. That gain is considered to be capital gain and not ordinary income recapture.

Maribeth

[WhiteOleander]

Burke,
I have always understood the law they same way that you have stated and reported installment sales just as you have. I will be interested to see if you find anything to the contrary.
Thanks

[BHoffman]

I think there is a big difference in

Recapturing GAIN due to depreciation

vs.

Recapturing DEPRECIATION.

See Pub 544.

"Section 1250 Property
Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. To determine the additional depreciation on section 1250 property, see Additional Depreciation, later."

"Additional Depreciation
If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method."

Therefore, there is NO Depreciation Recapture Income for Sec 1250 property if straight line was used.

Both pubs 544 and 537 contain the paragraph:

"Depreciation Recapture Income
If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. The recapture income is also included in Part I of Form 6252. However, the gain equal to the recapture income is reported in full in the year of the sale. Only the gain greater than the recapture income is reported on the installment method. For more information on depreciation recapture, see chapter 3 in Publication 544."

This paragraph has nothing to do with our discussion because it doesn't apply to depreciation taken on Sec 1250 assets using straight line. That depreciation is not recaptured. That depreciation is only important because the amount of gain attibuted to it is taxed differently than the rest of the gain.

Hope this helps.

[taxxcpa]

Thanks, Maribeth

But . . . . . . there is no "depreciation recapture" on the sale of property subject ot §1250. (there used to be, but that was before MACRS). There is unrecaptured §1250 gain. That gain is recognized first on the installment method. That gain is considered to be capital gain and not ordinary income recapture.

Maribeth

You have convinced me that you are right. I have a rent house and promised the tenant that I would sell him the house with no down payment if he paid the rent promptly for two years. The two years is about up, so if he decides to buy, I don't mind paying the profit percent times the depreciation taken, but I would not like to collect $ 1000 on the principal and have to pay tax on $ 10,000 or more the first year.

The terminology is confusing since any gain on a sale would be increased by prior depreciation, so you could call it recaptured, but it seems that the term "recaptured" has a specific meaning that does not apply to all capital gains.

Many years ago, there was no such term and if you sold any kind of property for which you had written off even 100% and deducted it from ordinary income, the gain was all capital gains taxed at the capital gains rate.

[Maribeth]

I agree with you, the terminology is very confusing. But it is also confusing because of the way all of our practices have gone and the areas of tax law that we have become experienced in. I have a lot of experience and education in this area of taxation and also in NOL's, which are very "popular" right now. However, don't ask me about dependency rules or EIC, because I am clueless. That is why this and other tax professional boards are so vital to us.

Maribeth

[Burke]

You are right and it is confusing to say the least. In reviewing the case I spoke of earlier, perhaps the reason the entire 1250 depreciation amount was reported in the first year was due to the fact that a very large payment was received in the first year and the rest over the next 3 years. The first payment exceeded the entire amt of 1250 gain calculated. Still, I would have thought that the 1250 and the reg cap gain amt would have been pro-rated by the percentage of one to the other and reported over the 3 years. That did not happen. ( Depreciation had been taken based on 39 Yr MACRS for commercial property.) Bought 1999, sold 2005.

[Burke]

Many years ago, there was no such term and if you sold any kind of property for which you had written off even 100% and deducted it from ordinary income, the gain was all capital gains taxed at the capital gains rate.

Not always. Remember ACRS?

[Davc]

If the recognized gain (Other than 1245 recapture) in the year of the sale was equal or greater than the UR 1250 then it would all be recognized in the year of the sale. The UR 1250 is recognized first.

[taxxcpa]

Acrs

Not always. Remember ACRS?

ACRS did not exist years ago. Years ago depreciation was based on cost minus salvage value and your estimate of useful life. You could use SL, DDB or SYD to calculate depreciation.