4797 Loss

[Janitor Bob]

Client has owned a house that she rented out for several years (Sch E income). In July, 2012, she sold the property at a large loss (-21,000). Am I correct that this loss is recorded on Form 4797? Is it correct in allowing the entire $21,000 loss in 2012? Should this loss be limited in 2012 with portion carried forward to future years?

This is the first time I have ever dealt with a loss on the sale of Section 1231 property

[Catherine]

Yes, sale of business assets is reported on Form 4797.

Losses are treated as ordinary for section 1231; not subject to $3K/year as are capital losses.

The Tax Book has a nice summary on page 6-13.

[Janitor Bob]

Thanks...I just did some reading and it looked like it would be ordinary loss....just wanted to be sure before I told the client the good news.

[Catherine]

Any time. I double-checked TTB before posting, to be sure I remembered correctly.

[OldJack]

Its not sec. 1231 property, it is sec. 1250 (depr property) reported on page 2 of the form 4797.

[Janitor Bob]

Correct Old Jack 1250 property....but is 1250 property not a sub-type of 1231 property?

[Jack from Ohio]

Don't forget recapture of depreciation... This is often a spoiler when a rental owner sells for what he/she thinks will be a loss.

[jklcpa]

Catherine is correct that sec 1250 property sold at a loss is reported on the 4797 on page one. If there was any sec 1245 that went with the sale, you'll need to allocate part of the sale proceeds and expenses of sale to these items and report that on page 2 of the 4797. Also, the portion of the sale attributable to the land should be broken out because land isn't sec 1250 property, but since this was sold at a loss, it will ultimately end up in the same section of the 4797 anyway.

[Janitor Bob]

I did not prepare this person's return....they did it themselves and just called me to make sure that the loss they had was ordinary loss....they were thinking it was a capital loss and limited to $3,000 per year. I will mention to the client the depreciation re-capture...with the understanding that it will likely cause confusion and, ultimately, a review of her return by me....which is when I will find out if it truly is a loss after recapturing depreciation that was taken....or could have been taken.

[Jack from Ohio]

I did not prepare this person's return....they did it themselves and just called me to make sure that the loss they had was ordinary loss....they were thinking it was a capital loss and limited to $3,000 per year. I will mention to the client the depreciation re-capture...with the understanding that it will likely cause confusion and, ultimately, a review of her return by me....which is when I will find out if it truly is a loss after recapturing depreciation that was taken....or could have been taken.

Then charge him for filing it correctly or amending. You deserve to get paid for what you know!

[Guest Taxed]

Jack is correct. Hand holding or advising a self prepared return without all the facts and how they calculated the loss could lead you to more headaches if things go wrong at a later date. You know who will get the blame!

[OldJack]

Catherine is correct that sec 1250 property sold at a loss is reported on the 4797 on page one.

Sec. 1250 property is first entered on page 2 of form 4797.

Edit: Page 2 if only a gain! However, you need to calculate according to page 2 to see if you really have a loss.

[OldJack]

Correct Old Jack 1250 property....but is 1250 property not a sub-type of 1231 property?

No not really with regards to reporting! Sec. 1250 is specifically about possible recapture of depreciation on "realty" property according to year and method of depreciation. Certain depreciation is recaptured and other depreciation is not. Sec. 1231 is about all different types of business property.

[jainen]

>>Sec. 1250 is specifically about possible recapture of depreciation<<

There is also that odd concept of "unrecaptured 1250 gain." Since you get a tax advantage of taking the 1250 loss against ordinary income, you can't turn around and claim a zero percent capital gain tax rate if you make money on other property. The look-back period is five years, and the maximum rate is 25%..

[TheFinanceWriter]

Further adding to the complexity is asking the taxpayer if there are any suspended losses on the rental property from prior years due to passive loss limitations.

By the way, Bob, a good business practice is collecting a small fixed fee from any taxpayer asking for assessment of a self-prepared return. If you find errors, simply report that mistakes exist, without detailing their nature. The taxpayer should then engage you to prepare the return correctly. The assessment simply achieves your opinion of whether the return is accurate.

[jklcpa]

...a good business practice is collecting a small fixed fee from any taxpayer asking for assessment of a self-prepared return. If you find errors, simply report that mistakes exist, without detailing their nature. The taxpayer should then engage you to prepare the return correctly. The assessment simply achieves your opinion of whether the return is accurate.

I disagree that assessing returns prepared by others is in any way good business practice. Giving a stamp of approval to a return not preparer by oneself opens up liability issues. What if that person giving the assessment fails to spot a problem? Doing this all for a small fixed fee is not worth the risk, in my opinion.

[Guest Taxed]

I agree, the risk is not worth it.

I won't even count how many free returns I do for family and friends. All of them started by asking me to do a quick once over their handiwork!

[jainen]

>>Giving a stamp of approval to a return not preparer by oneself opens up liability issues<<

It certainly does. Under Circular 230, a return preparer is "Any individual who for compensation prepares or assists with the preparation of all or substantially all of a tax return." So you can give advice about the treatment of a single item, but if you look at the entire thing you'd better be conducting a complete interview, starting with an engagement letter. Anything less would be stupid.

[kcjenkins]

I like your new avatar, Jainen.

[jainen]

>>new avatar, Jainen<<

Yeah, cool! I got one of them new smart-phoney things, so of course right away I took a picture of myself in the bathroom mirror!

[kcjenkins]

LOL. Sure yoou did!

[jklcpa]

>>new avatar, Jainen<<

Yeah, cool! I got one of them new smart-phoney things, so of course right away I took a picture of myself in the bathroom mirror!

You forgot the duck lips.

[TheFinanceWriter]

Just to clarify, my comment about assessment of a self-prepared return related to the original post, which was restricted to giving "advice about the treatment of a single item." Therefore, no Circular 230 violation exists because a single item is not "substantially all" of a return. Assessing a self-prepared return certainly should not entail "giving a stamp of approval" for the "entire thing." I'm not even sure how approving preparation of everything on the return is possible without actually preparing it using source data, which Jainen correctly points out is an engagement.

[mcb39]

I like your new avatar, Jainen.

Somehow, my brain won't let me connect the avatar with Jainen.

[kcjenkins]

That is what makes it funny, tho.