Need help on rental sale

[PIGLEE]

I am going in circles on the item, and I am about "batty".

Office rental that has been taking MACRS S/L Depreciation. Here are some figures

Cost 95000 (45,000 is for the land) purchased 1998

Depreciation is 18,000. All straight line.

Sale Price is 130,000

Profit 53,000

Some places I read (and understand) that I DO NOT have to recapture the depreciation as ordinary income.

Then I read (and understand) that I HAVE TO RECAPTURE AS ORDINARY INCOME.

Which is right?. Does the fact that it has been reported on Schedule E, make a difference?

Just what is the definition of "unrecaptured section 1250 gain"? Is it really the normal tax rates with a limit of 25%?

I caught this because I am testing out a new program, and put this return in the old program, and the new program, and got different results. To complicate things, it is also an installment sale.

Any help would be appreciated, I sure need another opinion.

[Maribeth]

I am going in circles on the item, and I am about "batty".

Office rental that has been taking MACRS S/L Depreciation. Here are some figures

Cost 95000 (45,000 is for the land) purchased 1998

Depreciation is 18,000. All straight line.

Sale Price is 130,000

Profit 53,000

Some places I read (and understand) that I DO NOT have to recapture the depreciation as ordinary income.

Then I read (and understand) that I HAVE TO RECAPTURE AS ORDINARY INCOME.

Which is right?. Does the fact that it has been reported on Schedule E, make a difference?

Just what is the definition of "unrecaptured section 1250 gain"? Is it really the normal tax rates with a limit of 25%?

I caught this because I am testing out a new program, and put this return in the old program, and the new program, and got different results. To complicate things, it is also an installment sale.

Any help would be appreciated, I sure need another opinion.

You are talking apples & oranges. Recapture of accelerated depreciation over straight-line depreciation is one concept: unrecaptured §1250 gain is another.

You have been using MACRS on the rental property. By definition, you will not have ANY accelerated depreciation, you have only been using straight-line. There is NO depreciation recapture using ordinary income rates on the sale.

Now, unrecpatured §1250 gain, you probably do have. That gain is the gain caused by the depreciation of the property, not the appreciation of the value of the property over the term of ownership.

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

An example: Original cost is $100,000. Property has appreciated to $120,000, which is its current selling price. Depreciation taken is $30,000.

Gain on the sale is $50,000 (120,000 - 70,000). Gain subject to regular capital gain rate of 15% is $20,000; gain subject to 25% is $30,000.

hth,

Maribeth

[PIGLEE]

Thanks that helps alot. Your first statement clairifies a lot. I was thinking of them as the same thing. No wonder my thinking was going in circles. Although I was really hoping for the all capital gains answer, it was a lot cheaper.

[taxmom34]

maribeth

now, you have confused me in your example. you subtracted the 30,000 depreciation from the cost to bring down the basis. my confusion is how you seperated the 50,000 gain, how do you do that on tax return? for the 15% and 25%,

[PIGLEE]

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?

[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

[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.

[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.

[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.

[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.

[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

[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%.

[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

[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.

[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.