Black Bart/ I wondered

[Black Bart]

where everybody went to. Looks like the whole bunch is or has been here.

Nice ambience. Thanks for the invite, Bees. In deference to your request I didn't mention you on QF (although some others did today), but still, as a fledgling business, I know y'all must need support (aka: money) pretty quick. Therefore, I'm sending my order for the Deluxe and All States books and implore others who want this place to keep breathing to do the same ASAP.

Say, Armando; I note that Snag and Bees are picking on you about your partnership
stance again; that is, the question of whether or not a 1065 is "to be or not to be." Although I've traditionally been on the "nay" side, I always sympathize with the underdog. Therefore, since my granddaughter and her little friend are opening a lemonade stand, I intend to file a partnership return for them as a symbolic gesture to validate your position. Come to think of it, they also do a little yard work--do you suppose if I made two C corps out of them, they would qualify as a brother-sister controlled group? As I recall there's $102,000 of S-179 to split between them and which would let them write off both their tablecloth and weedeater right away.

Oh well, enough folderol; on to "tax focus" before I get deleted. Does anybody here know offhand what the current rule is on the recapture of depreciated property when it's sold on the installment plan, like say, a $30,000 machine with no basis left in it and
the installment payment is only like $5,000. Does the $30,000 have to be recaptured in the year of sale or is spread out over the life of the contract? I should know this and have done it a few times, but for some reason it keeps slipping my mind. I believe the rules have been changed a few times, once in '84 seems like, but anyhow, what is it now?

Sandy: after reading your post under "My CPA said this" about the guy who filed a 1040X and got a refund from IRS for the death exclusion, I really probably should not even bother to ask the above question and just go ahead and do it whatever way I want. I suspected they weren't "minding the store," but that's one of the most astounding lapses into complete ignorance that I've ever heard of. No wonder we can't tell anybody you can't do this or that and make it stick. Things like that make us look like incompetent fools. Ah, well; virtue is its own reward (or something like that) and such is life, etc. etc.

[DTS]

Really happy to see you!

Hi Bart,

I'm so happy you joined in for a post. I was telling a friend the other day you had not been on. She emailed me tonight with the good news!

Dennis

[Bird Legs]

Recapture Depreciation

Hello there Black Bart. Re. your question on recapture of depreciation on an installment
sale, all depreciation is recaptured in the year of sale.
Hope things are going well and you are enjoying the summer sunshine.
It is supposed to be 102 in the shade here in good old Austin Tx today.
tweet...

[Snaggletooth]

More Black Bart

Also very happy you found your way to the new board Bart - now I'm not the only tax pro with overalls.

With respect to DTS, all this happiness doesn't really answer your question. I remember the 1984 change which forces you to IMMEDIATELY recapture depreciation. However there is a line item on the Installment Sale which asks you to report "that portion of the principle which represents ordinary income." So I've wondered the same thing myself.

The way I've handled this in the past is to apportion the amount of TOTAL income recognition on the 6252 based on the profit percentage and the amount of principle received. Early in the course of the note, I enter ALL of the recognized income as "ordinary" income on the aforementioned line item. After the recapture amount has been exhausted, then I begin reporting capital gains for the duration of the loan. Actually, there will be one year in which there will be a split amount shown on the 6252 - for earlier years it will all be ordinary income, and for later years will be all capital gains.

Interesting question, and I've wondered how everyone else dealt with it. Would like to hear from others.

Regards, Ron J.

[Snaggletooth]

Bird Legs

Bird Legs, I read your reply - thanks for contributing. I understood in 1984 that depreciation recapture was immediate, and could not be deferred by an installment sale.

However, there still exists a line item on the 6252 which asks us to enter the amount of profit attributable to "ordinary income." If depreciation recapture cannot be deferred, then what is this line item for?

Thanks, Ron J.

[Bird Legs]

Recapture -Snag

Thanks for waking me up. When I posted that response I had only 1 cup of coffee.
Now I am about 3/4 awake.
Bye the way, again I do appreciate you calling this to my attention.
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[Bees Knees]

Depreciation recapture in year of sale.

I understood in 1984 that depreciation recapture was immediate, and could not be deferred by an installment sale. However, there still exists a line item on the 6252 which asks us to enter the amount of profit attributable to "ordinary income." If depreciation recapture cannot be deferred, then what is this line item for?

Which line are you referring to? I don’t see those exact words on the 6252.

The instructions for Line 12 read as follows:

“Any ordinary income recapture under section 1245 or 1250 (including sections 179 and 291) is fully taxable in the year of sale even if no payments were received. To figure the recapture amount, complete Form 4797, Part III. The ordinary income recapture is the amount on line 31 of Form 4797. Enter it on line 12 of Form 6252 and also on line 13 of Form 4797. Do not enter any gain for this property on line 32 of Form 4797. If you used Form 4797 only to figure the recapture amount on line 12 of Form 6252, enter “N/A” on line 32 of Form 4797. Partnerships and S corporations and their partners and shareholders, see the Instructions for Form 4797.”

If you follow the mechanics of completing the rest of the form, you will see that this line 12 entry has you back out ALL of the gain that represents depreciation recapture so that you don’t even deal with it on the 6252. Instead, as the instructions say, it is all reported on the 4797 in the year of sale even if none of the principal was actually received.

I have a feeling the line number you are referring to wants you to subtract out the ordinary gain portion of the principal in later years because you already paid tax on the full ordinary gain in the year of sale.

[Snaggletooth]

Ordinary Income Recapture Again

This is an old thread, but since I've got Bees Knees on the hook for this one, I don't wanna start another discussion.

A few days ago, we were discussing Black Bart's treatment of depreciation recapture on installment sales, and a 1984 change which causes "immediate" recapture. After all the discussion, I don't know whether ALL depreciation must be immediately recognized, or whether it is only "ordinary income." The two are NOT the same.

Beeswax, from line 25 on 6252, "Enter the amount of Line 24 that is ordinary income under recapture rules." This brings back all the unanswered questions in the thread above.

The portion to be recaptured in the case of real estate (Section 1250) might be almost zero, especially in the post 1986 era law. Section 1250 recognizes ordinary income on depreciation only to the extent that depreciation exceeds straight-line. After ACRS was scrapped, real estate could only be depreciated under straight line, so there would be NO such excess to be recognized as ordinary income. Of course Sec 1245 does have an accelerated portion, but ALL depreciation recapture for Sec 1245 is ordinary so this is moot.

The question becomes, "What has to be immediately recognized in the year of sale - ALL depreciation or only that excess depreciation which represents ordinary income?" We're all capable of reading the instructions, but already there have been questions about what the instructions really say, or that they conflict with other instructions and the Service is thus ambiguous.

For example, if (as you say) you follow the mechanics of Form 4797, you will calculate only the ordinary income portion (not necessarily ALL depreciation).

Thanks in advance - Ron Jordan

[Bees Knees]

installment sale reporting

You are correct in saying depreciation recapture refers to the portion of the gain that is ordinary gain. After 1986, there is no ordinary gain on real property because it is straight line depreciation, which produces unrecaptured 1250 gain when sold (thus the term unrecaptured instead of recapture). Under the installment sales method, you pay tax on all ordinary gain when the property is sold, even if you did not receive payment for it all up front. It is the capital gain (including unrecaptured 1250 gain) that is spread out over the life of the installment note.

When you look at the mechanics of filling out a 6252, note that the instructions for line 12 tell you to report that portion of the gain on Form 4797, Part III, which is where you split out the ordinary gain portion of a sale of section 1245 and 1250 property. Section 1250 property is generally real property, and since we already discussed how real property only has ordinary gain on depreciation recapture prior to 1987, then Form 4797, Part III would only apply to real property acquired prior to 1987.

After having subtracted out the ordinary portion of the gain, the form 6252 goes on to calculate the portion of the gain that can be reported under the installment method. Form 4797 already has you paying tax on the total gain that represents depreciation recapture in the year of sale. Now the 6252 calculates the rest of the gain that can be reported under the installment method, which is all gain except ordinary gain. The portion of gain that can be reported under the installment sale method would thus include unrecaptured 1250 gain from straight line depreciation of real property.

Then we get to line 25 of form 6252. The reason that line exists is to prevent you from paying double tax on the ordinary gain you already paid tax on in the year of sale. Line 25 has the purpose of backing out the ordinary gain portion of a payment of principal so that line 26 only represents that portion of principal that can be reported under the installment method.