Discussion:Gain/loss on sale of rental property/depreciation recapture?
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Discussion Forum Index --> Tax Questions --> Gain/loss on sale of rental property/depreciation recapture?
| 18 May 2011 | |
| I feel like I'm getting the depreciation recapture rules muddled in my brain.
S-corp owns rental residential property, purchased in July 2007 for $40,884 and has made improvements totaling $27,700 for a basis of $68,584. Property has been depreciated SL 27.5 years and depreciation totals $7,352. This would bring the basis to $61,232. If the client sells anywhere under $61,232, it should be a capital loss. If the client sells at $64,232 the $3,000 gain would be subject to depreciation recapture and taxed at 25%. If the client sells at $70,000, $7,352 would be depreciation recapture and taxed at 25% and $1,416 would be a capital gain taxed at 15%. I don't think the above is right and all of the research I've done this morning keeps making me change my mind. | |
TreyMeans3 (talk|edits) said: | 18 May 2011 |
| Generally, any depreciation taken on the property (which is an ordinary expense) must be recaptured as ordinary income. This would show up on page 2 of the 4797. However, if there is a loss on the sale, it remains a capital loss subject to the capital loss limitations/carryovers. Depreciation is only recaptured on any potential capital gain on the sale. A loss is a moot point. In a nutshell, the only way you will come out of this with capital gain (at the lower rate) is if your gain on sale exceeds the depreciation taken on the property. | |
| 18 May 2011 | |
| DJCCPA, the only thing I differ with you is this statement If the client sells anywhere under $61,232, it should be a capital loss.
If the building is sold for under $61,232 it will be Sec. 1231 loss (ordinary) not capital loss. The rest is correct. | |
Harry Boscoe (talk|edits) said: | 18 May 2011 |
| Because this real estate has been depreciated using a straight-line method, there is **no** "depreciation recapture".
Does anybody else feel as I do about this question and these answers? HINT: There may be some "unrecaptured section 1250 gain". | |
TreyMeans3 (talk|edits) said: | 18 May 2011 |
| Sorry, missed the straight-line reference. However it's dressed up (1250 vs. recapture), the ending would still be the same though: ordinary rates of income, no? | |
TreyMeans3 (talk|edits) said: | 18 May 2011 |
| ^^^^^^(I should say, rates above and beyond your typical capital gain rate. Don't want to get fried for using the wrong term again, especially if the taxpayer is in the 35% range) | |
Spell Czech (talk|edits) said: | 18 May 2011 |
| Generally speaking, when residential rental property (real estate) that has been depreciated is sold, the gain or loss from the sale is a Section 1231 gain or loss. If the property is sold at a gain, some or all of the gain might also (in addition to being a Section 1231 gain) be unrecaptured section 1250 gain. The sale gets reported *first* on Form 4797 and your software will take care of the rest, you had better hope (but the software will do that **only** if you have identified the elements of the sale correctly. "*Vocabulary* counts" so to speak, in this business).
And spelling counts, too: If you don't spell the words right, then The Yellow Box of Search won't be able to find your post later on when someone else is seeking enlightenment. But maybe... | |
| 19 May 2011 | |
| I specifically mentioned the SL depreciation because that is EXACTLY the part that was confusing me. Re-read Chapter 3 of Publ. 544 and the client should end up with ordinary income/loss. But I do need to ask him if the property is low-income housing. I know that two properties in one of his other companies are low-income. | |
Spell Czech (talk|edits) said: | 19 May 2011 |
| Low income housing?
Well, I'm sure glad I wrote "Generally speaking...." | |
Death&Taxes (talk|edits) said: | 19 May 2011 |
| Aside from the use of the word "Recapture," I think the instructions to Form 4797 are much more in tune with what is being said here than Pub 544........they even mention the famous Section 1245 trap for certain ACRS property.....and by following them, you should arrive at the correct result.
Of course I will apply the caveat that it is nice to learn this late in the game that this might be low income housing. Like so many discussions here, nothing is learned until the last drop is squeezed out. | |
| 19 May 2011 | |
| Spell Czech (talk/edits) said:
... some or all of the gain might also With you and agree, but when would ALL of the gain be subject to 1250 recap? Example? | |
Spell Czech (talk|edits) said: | 19 May 2011 |
| Are you referring to recapture under Section 1250 or are you referring to unrecaptured section 1250 gain? Please note that they are very different things, which is, after all, one of the central issues in this thread so far...!! | |
| 19 May 2011 | |
| I think Harry should include the distinction on his summer syllabus.
It is confused on various boards. | |
| 19 May 2011 | |
| Mind you, I have no idea if it's low income housing or not. I just know that he has those types of properties in his LLC; so it's always worthwhile to ask, just in case. Not that the client has answered me in this regard yet, why would he do that? ;-)
The sale hasn't happened yet; this is all for planning for a new client so I'm still learning about his businesses, assets, etc. I appreciate all of the insights! | |
Harry Boscoe (talk|edits) said: | 19 May 2011 |
| Reminder!! Summer School Starts Soon! Sign up early, sign up often!
Asset Sale and Section 1231 - Should it be added to the Syllabus for Summer Session? I think IRS Forms and Publications do a bang-up job on this topic. And based on this thread, I think nobody's reading those forms and pubs! It looks like a Refresher Session is needed... Would this be a Cost Recovery Recapture Refresher Reminder? Does anybody remember where the TTI list is? | |
| 20 May 2011 | |
| Residential rentals below FMR might make the Tough Tax Issues based upon the many times the topic has appeared in one form or another.
For example, Line 21 income (or Sch E) and limited deductions because of not for profit activity as in §183. On the other hand, personal use under §280A. Perhaps even a sharing of expenses in some instances. May be just holding for appreciation. | |
