Installment Sale of rental property

[mhcpa1964]

Hi all,

Client is a husband and wife partnership filing Form 1065. The partnership owned a rental property that was sold in 2022 for $110k. They received $25k at closing. I calculated the total gain as $93,096 and the unrecaptured 1250 gain is $29k.

I'm using Form 6252 for the installment sale. When using that form, should the entire unrecaptured 1250 gain be included on the 2022 return? Or is 1250 gain prorated within 6252?

Asking for forgiveness in advance for potentially not phrasing my question properly. I'll appreciate anyone who would help talk or walk me through this.

[kathyc2]

The amount received is prorated between return of capital and gain. Using the numbers your gain will be about 85% of total payments. If all they received is 25K then 21,250 will be taxed at 1250 rates. The lower LTCG rates don't kick in until the 29K 1250 has been paid via the down payment and principal part of loan.

[Rapid Robert]

One general source of confusion is that many tax pros incorrectly refer to unrecaptured Sec 1250 gain as "depreciation recapture". True depreciation recapture is indeed all reported entirely in the first year of the installment sale, but Sec 1250 gain, which is not depreciation recapture, is treated as kathyc2 describes.

Also, don't forget to include unstated interest in your calculations. Pub 537 is a good reference for installment sales.

[mhcpa1964]

Thank you all very much. I really appreciate your input and guidance.