Rental Sale at Gain -- Offset of investment interest expense?

[appelman]

If a rental property is sold at a gain, can the seller elect to forgo capital gains treatment and offset the gain against investment interest expense? Substantiation either way would be appreciated.

[taxxcpa]

Offsetting gain and expense

See page 4-13, second column of The Tax Book.
An election to treat dividends as long-term capital gains as investment income CAN be made.

[Kram BergGold]

No quite

The election is to include LT cap gain and or qualifying dividends as part of investmenbt income. If you make this election you are making an election to offset the investment interest against 15% income. So the deduction is used but saves less than if used against interest or short term gain.

[Roland Slugg]

Yes. See F-4952 and related instructions, for lines 4d and 4g in particular.

[OtisMozzetti]

Yes. See F-4952 and related instructions, for lines 4d and 4g in particular.

I would defer to the instructions for Form 4952, but on the other hand it seems to me that gain on sale of rental property is rental business income instead of investment income.

EA in California

[Burke]

The gain on sale of rental property will wind up on Sche D as a (probably long-term) capital gain and therefore be qualified to use on 4952 for deduction of investment interest expense.

[appelman]

On the one hand... But on the other hand...

It is, in fact, Section 1231 gain. Does the fact that it flows to Schedule D make it indistinguishable from capital gain from investment property? I have been unable to find a really definitive answer. I don't feel that the Form 4952 instructions are that all definitive. For example:

"Line 4d
Net gain from the disposition of property held for investment is the excess, if any, of your total gains over your total losses from the disposition of property held for investment. When figuring this amount, include capital gain distributions from mutual funds and capital loss carryovers."

We are not strictly talking about "property held for investment." In defining Sec. 1231 property, rental activities are lumped with business activities, so the same question will arise in regard to sale of property used in a business.

[OtisMozzetti]

It is, in fact, Section 1231 gain. Does the fact that it flows to Schedule D make it indistinguishable from capital gain from investment property? I have been unable to find a really definitive answer. I don't feel that the Form 4952 instructions are that all definitive. For example:

"Line 4d
Net gain from the disposition of property held for investment is the excess, if any, of your total gains over your total losses from the disposition of property held for investment. When figuring this amount, include capital gain distributions from mutual funds and capital loss carryovers."

We are not strictly talking about "property held for investment." In defining Sec. 1231 property, rental activities are lumped with business activities, so the same question will arise in regard to sale of property used in a business.

We are talking about foregoing the "capital gain treatment" of gains on real estate in exchange for the privilege of deducting investment interest on other investments. Something else which bothers me is that the gain on real estate might consist in large part of "unrecaptured 1250 gain", i.e. maximum 25% rate gain. They're not going to be as happy about seeing the taxpayer give up maximum 25% rate gain as they would be to see the taxpayer give up maximum 15% 1231 capital gain.

[appelman]

I dunno!

After all, the election would be to treat it as ordinary income.