Reporting sale of rental and land

[Bonnie]

TP bought land with 2 houses on in 1997. 2 houses were rented for the entire time TP owned property. Land and houses was sold in 2006. On sch E houses were listed as 2 separate rental units. When I report the sale, do I report all of this as one entry? Or do I report the land separately and group the 2 houses together? Or separated all 3? Since all was sold together, do I use a % of the sale price to figure what part was for each portion? Price paid for all in 1997 was $131,000. Sold in 2006 for $104,000. On Sche E over the rental period one house was depreciated with a value of $30,000 and the second house with a value of $12,000. So I guess the other $89,000 would have been the initial cost of the land. I've not had to do this before so appreciate any help anyone can give me.

Thanks
Bonnie

[solomon]

Personally

I would do 3. Each house in Part III of 4797 and the land in Part I. Don't forget the unrecaptured 1250 gain. Allocation will be required.

[OldJack]

I would do 3. Each house in Part III of 4797 and the land in Part I. Don't forget the unrecaptured 1250 gain. Allocation will be required.

I don't see any reason to separate the land from the buildings. Its §1250 property in PartIII and the gain goes to Part I of form 4797 anyway. Also don't forget "nonrecaptured net section 1231 losses from prior years" on line 8 that might keep you from the gain going to Sch-D and capital gains rates.

[jainen]

The title

>>I don't see any reason to separate the land from the buildings. Its §1250 property... <<

The title of IRC Section 1250 is "Gain from dispositions of certain depreciable realty." The instructions to Form 4797 specifically state that land and buildings must be reported separately. They explain that "you must allocate the amount realized between the types of property based on their respective fair market values (FMVs)."

[OldJack]

>>I don't see any reason to separate the land from the buildings. Its §1250 property... <<

The title of IRC Section 1250 is "Gain from dispositions of certain depreciable realty." The instructions to Form 4797 specifically state that land and buildings must be reported separately. They explain that "you must allocate the amount realized between the types of property based on their respective fair market values (FMVs)."

If you fill out the form you would see that you will end-up with the same results either way. I can understand allocating if the land and the building were purchased at different times and one is long-term and the other is not, otherwise you get the same results without all the fuss.

[iratax]

Gain or loss

It only makes a difference if the amount of depreciation recapture or 1250 gain is limited by the amount of gain. By reporting them separately the gain on the depreciable parts is less because some of the gain has been allocated to the land and the recapture may be less.

[BOB W]

It only makes a difference if the amount of depreciation recapture or 1250 gain is limited by the amount of gain. By reporting them separately the gain on the depreciable parts is less because some of the gain has been allocated to the land and the recapture may be less.

GREAT POST..............

[jainen]

It doesn't make any difference.

>>GREAT POST<<

Yeah, but real estate is generally straight line and doesn't have any depreciation recapture. The form itself tells you to skip everything and just enter zero on line 26g.

Since Old Jack was challenging my post, I tried to come up with a common situation that would make a difference. Besides a pass-through or "corporation subject to section 291" (whatever that is) or casualty loss or etc. What if there were multiple properties, including some 1245 recapture? What if the value was all in the land, and the building when separated actually showed a loss?

Nope. I have to agree with my challenger. It doesn't make any difference.

[OldJack]

It only makes a difference if the amount of depreciation recapture or 1250 gain is limited by the amount of gain. By reporting them separately the gain on the depreciable parts is less because some of the gain has been allocated to the land and the recapture may be less.

That is a good point that I have not thought about, it may be true or not, I would have to work out examples to be convinced.

Since 1988, MACRS 1250 property depreciation is not recaptured as ordinary income, I wonder if it really makes a difference. You can't really say that "Unrecaptured Section 1250 Gain" is the only reason as "Nonrecaptured net section 1231 losses from prior years" may make the entire gain, land and building, ordinary gain. If the building was depreciated under ACRS I could see there could be a difference.

[George Boutwell]

Yeah, but real estate is generally straight line and doesn't have any depreciation recapture. . . . What if the value was all in the land, and the building when separated actually showed a loss? Nope. I have to agree with my challenger. It doesn't make any difference.

Please, it's too close to April 17, or whatever the due date is this year, to try to figure out if you are being subtle with tongue in cheek. It's quite possible that the land increased in value while the buildings decreased -- maybe the buyer is just going to tear them down anyway. And there may not by recapture of accelerated depreciation, but there is Section 1250 gain taxed at a higher rate. That's what you are trying to say, right? You just think you can get away with mocking another post.

[jainen]

his simple, factual conclusion.

>>You just think you can get away with mocking another post<<

Golly, I've really messed up my reputation here, haven't I? You know, I took Black Bart's pledge almost a year ago, and stayed with it too, but I'm still being accused of "mocking another post." BB himself notoriously labeled me "dadgum" just this morning, and never acknowledged my defense concerning Linda's question. Well, if Linda herself doesn't speak up for me pretty soon, I might have to just give it all up.

We are talking about Form 4797, right? As Old Jack said, Sections I and III get combined and flow off of Line 7, to Schedule D. There is NOTHING in Form 4797 that reflects what tax rate will be appropriate--that is handled on Schedule D itself, and doesn't require 4797 at all.

Listen, how can I make this any clearer? Old Jack was right. In spite of the instructions I pointed to, it will usually not make any difference if you do the extra work or not. There is nothing to mock about his simple, factual conclusion.

[OldJack]

It's quite possible that the land increased in value while the buildings decreased -- maybe the buyer is just going to tear them down anyway. And there may not by recapture of accelerated depreciation, but there is Section 1250 gain taxed at a higher rate.

George, assuming there is a long-term gain to recognize on both land and building, and the fact that f4797, Part III 1250 gain not recaptured, flows to Part I where the land is reported.. where is the difference when the 2 gains are added together for possible flow to Sch-D? But then it might not get to Sch-D. True if it flows to Sch-D this might change the amount of "Unrecaptured Section 1250 Gain" but I don't know without actually checking examples and I am not interested in doing that right now.

[Davc]

What gain?

[George Boutwell]

For example

Cost of land: 100K

Cost of buildings: 200K

Depreciation claimed on buildings: 50K

Selling Price: 400K

Value of Land When Sold: 225K

Value of Buildings When Sold: 175K

If you add land and buildings together on Page 2 of Form 4797, aren't you going to come up with 50K Section 1250 gain on Schedule D, when really you should have only 25K?

Maybe not. And I agree that "usually" it doesn't make a difference. But usually the Indians don't get snowed out.

[Black Bart]

Dear block-buster/post-mocker/muck-raker/whatever

>>You just think you can get away with mocking another post<<

Golly, I've really messed up my reputation here, haven't I? You know, I took Black Bart's pledge almost a year ago, and stayed with it too, but I'm still being accused of "mocking another post." BB himself notoriously labeled me "dadgum" just this morning, and never acknowledged my defense concerning Linda's question. Well, if Linda herself doesn't speak up for me pretty soon, I might have to just give it all up.

Don't get upset; I take it back. I had not read your answer to Linda (I've been sleepin' and takin' the day off), so I hadn't had the chance to take in your splendid reply to her. Please accept my sincere and heartfelt mea culpa as, no doubt, I've grossly mischaracterized you -- you who are the very soul, essence, and incarnation of magnanimous responsiveness.

There! How's that? I'm layin' it on a bit thick 'cause if you get mad and go away, then that just leaves Jack for the heavy lifting and, you never know, one of the newbies might make him mad too. Then where'd we be (once we're outta 1040s, I'm outta gas)?