Discussion:Installment sale and reduction of tax attributes

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Discussion Forum Index --> Advanced Tax Questions --> Installment sale and reduction of tax attributes

Discussion Forum Index --> Tax Questions --> Installment sale and reduction of tax attributes

WIBadgerCPA (talk|edits) said:

23 April 2014
I believe that installment sale treatment isn't allowed on the sale of a rental property to the extent there is §1250 recapture (depreciation in excess of straight line). If the taxpayer went through bankruptcy, and had to reduce his basis in the rental as part of that process, is the reduction of his basis because of that considered part of the §1250 recapture. If so, that part of the gain would be taxable immediately. If not, I think it can be postponed until payments are received. Anybody know?

WIBadgerCPA (talk|edits) said:

23 April 2014
Never mind, just found by answer. Basically converts it to §1245 property, and is taxable up front. Found the answer in Pub 908 on page 27.

Harry Boscoe (talk|edits) said:

23 April 2014
I hope that the "conversion" to §1245 property is only to the extent of the basis reduction, and I wonder if the IRS pub explained that. Also, when you say "taxable up front" you mean in an installment sale, right?

Doug M (talk|edits) said:

24 April 2014
WIBadger, you are correct.

"Unrecaptured section 1250 gain" is not income that is accelerated upon disposal in an installment sale.

But, basis reduction due to COD is considered to be depreciation taken, and it is treated as IRC 1245 depreciation taken. So, yes, the gain is accelerated upon disposition.

Harry Boscoe (talk|edits) said:

24 April 2014
Here's what the Pub says:

"...if he later sells the condominium at a gain, the part of the gain from the basis reduction will be taxable as ordinary income."

And here's what the Code says:

"(d) Recapture of reductions
(1) In general
For purposes of sections 1245 and 1250 - (A) any property the basis of which is reduced under this section and which is neither section 1245 property nor section 1250 property shall be treated as section 1245 property, and (B) any reduction under this section shall be treated as a deduction allowed for depreciation. (2) Special rule for section 1250 For purposes of section 1250(b), the determination of what would have been the depreciation adjustments under the straight line method shall be made as if there had been no reduction under this section."

Please note carefully the "neither...nor" language in (1)(A) above. That sorta leaves me thinking that Section 1250 property stays Section 1250 property after a Section 1017 basis reduction, but that the recapture rules get complicated by (1)(B).

DaveFogel (talk|edits) said:

28 April 2014
IRC §1017(d) was enacted in the Bankruptcy Tax Act of 1980 (P.L. 96-589). The Senate Finance Committee report (H. Rept. 96-1035, p. 16, 11/25/80) states the following:

"Recapture rule.—To ensure that ordinary income treatment eventually will be given to the full amount of basis reduction, the bill provides that any gain on a subsequent disposition of reduced-basis property is subject to “recapture” under section 1245 or the Code, or in the case of depreciable realty, under section 1250. (This recapture rule applies to any reduced-basis asset, whether depreciable or non-depreciable, and whether or not a disposition of such asset otherwise is subject to recapture under Code sections 1245 or 1250.) The computation of the amount of straight-line depreciation (under sec. 1250(b)) is determined as if there had been no reduction of basis under section 1017."

Accordingly, it appears that the amount of the recapture for section 1250 property is the excess of (1) total depreciation taken plus basis reduction, over (2) depreciation computed under the straight-line method as if the basis reduction hadn’t occurred.

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