Need help on rental sale

[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.

[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

[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.

[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?

[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!!!!!!

[BHoffman]

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.

[PIGLEE]

Thank you all, for all your responses. I am very comfortable that it is correct. I think I got all the cobwebs out of my brain, at least for now. I work at home now, by myself, and I miss the other preparer to talk things over with. This form is an extreme help. When my old program was doing it wrong, I was happy and wanted it to be right. But now I am happy that IT IS CORRECT.

[S T]

Agree

This is one of those most difficult issues to try to explain.

It was also good that Maribeth pointed out that we need to be mindful of separating out cost/sale/cost of sale expenses. etc to Land and Building for the calculation.

Sandy

[veritas]

I think for the most part Maribeth

did good job in explaining the tax ramifications. I'm pretty sure she knew the maximum tax on unrecaptured 1250 gain is 25%.

[Maribeth]

There is no "PROBABLY" about it. Whenever there is a gain on the sale of real estate and there has been depreciation taken, there WILL be unrecaptured §1250 gain.That is also incorrect. Unrecaptured §1250 gain is taxed along with all other ordinary income. The only special rule is that the MAXIMUM rate that it can be taxed is 25%. So it can be taxed at 10%, 15% or 25% ... but none of the higher rates.

Of the issues that come up on a fairly regular basis this has always been one of the least correctly understood ones.

Yes, Roland, I agree with your corrections.

Maribeth

[Davc]

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.

Disagree. That's why it's called Unrecaptured 1250 Gain. However It is recognized first as principle is received.

[Burke]

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.

[taxmom34]

piglee

my understanding of sale of rental property is the same as yours. i was taught that the depreciation is taxable as ordinary income (so whatever t/p rate happens to be, depending on other income) and the gain is reported on form 4797 where it is seperated that way. and then you go on to the installment sale., and the schedule D. AND you do need to seperate the land. the ordinary income will be taxed completely the first year and capital gains every year of the installment. seperating it into two capital gain rates confuses me.

[Roland Slugg]

Maribeth's reply is incorrect

Now, unrecpatured §1250 gain, you probably do have.

There is no "PROBABLY" about it. Whenever there is a gain on the sale of real estate and there has been depreciation taken, there WILL be unrecaptured §1250 gain.

That gain is subject to a 25% capital gain rate, not a 15% rate.

That is also incorrect. Unrecaptured §1250 gain is taxed along with all other ordinary income. The only special rule is that the MAXIMUM rate that it can be taxed is 25%. So it can be taxed at 10%, 15% or 25% ... but none of the higher rates.

Of the issues that come up on a fairly regular basis this has always been one of the least correctly understood ones.

[Maribeth]

She got some of my figures wrong, or she was using another example with amounts very close.

My example is::

Cost 95,000
Depreciation (straight line) 18,000
Sa;es Price 130,000

Profit is 130,000 - 95,000 + 18,000 = 53,000 Profit

Question is the 53,000 taxeed all as capital gain ?

OR
18,000 taxed as ordindary income & 35,000 taxed as Capital Gain ?

Hope that helps? What is your opinion?

Piglee, I was not using your specific facts in my first reply, I was just using a general example.

In your above situation: Your gain is comprised of two components, the gain attributable to the increase in fair market value which is $35000 and the gain attributable to prior depreciation taken which is $18000. The total gain on the sale is $53000.

The $35000 gain is capital gain and subject to 15% rate. The nonrecaptured §1250 gain of $18000 is subject to the 25% rate. The Schedule D tax calculation worksheet has 3 tiers on it and you must make sure that the information for the 25% rate is on the worksheet. Your tax sofltware should handle this properly, but double-check it to be sure.

Also -- to muddy the waters further -- the sale must be broken down into its components of land & building. IRS §1250-1(a)(6) mandates this. You may find after you have done this allocation, if the land has appreicated faster than the building, that your client has less tax to pay than you had originally thought.

Maribeth