Residential rental sold

[TAX4US]

Something has me perplexed. TP sold residential rental with sl dep all years @27.5. Gain will be 28k. Has a non recaptured 1231 loss prior year $8700. My problem is that if I put the sale on 4797 part 3 as sec 1250 tp tax increases by 2200. If I report in part 1 due to sl dep all yeras tax goes dow by 2200. The 8700 is showing as ordinary income on 1040. So the question is do I report in part 1 or part 3 of 4797? or what have I missed? Many thanks

[Rapid Robert]

If I report in part 1 due to sl dep all yeras tax goes dow by 2200. [...] So the question is do I report in part 1 or part 3 of 4797?

Not sure what you mean by "If I report in part 1 due to sl dep all [years]"? The fact that there was SL depreciation is irrelevant, you still have Sec 1250 gain to report. The instructions for Form 4797 are clear,

Depreciable real trade or business property held more than on year => report gain on 4797 Part III (1250)

(The land portion, however, would go to Part I, as I recall, since it is not depreciable).

Any 1231 losses from the previous five years, as you discovered, will be used to change the nature of the gains from capital gains to ordinary income (in other words, the $8,700 portion of gain is not additional gain, it is just a category of gain that is taxed as ordinary income instead of capital gains rates). This is similar to, but independent of, the Sec 1250 gain which is still capital gain, but can be taxed at up to 25% rate instead of ordinary L/T cap gains rate.

In both cases, the logic is, the prior deductions (for depreciation, or Sec 1231 losses) were used to offset ordinary income, so when (due to timing differences) these deductions come back into income (as gain on sale), they should not benefit from low cap gains rates, but rather should be taxed at something closer to the rate at which they were previously deducted.

[Kram BergGold]

As per Rapid Robert the sale goes on part III. A simple way to look at the extra tax is, I think the increase in tax is do to section 1250 gain which should be about 13% of $19,300 (28k less $8700) which is $2500. This is close to $2200. . .

[Burke]

There should be a worksheet in your tax software which will show these calculations, including the various tax rates and the amount of income each type is subject to. Perhaps that would make it clearer.