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Help! 1250 depreciation recapture installment sale


JackieCPA

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Hi! 

So I have a sale of a rental residential real estate property (Section 1250 Property). The entire gain is from depreciation recapture. It is done on an installment sale, however, according to Form 6252 instructions: 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. ATX is putting the sale on Form 4797 and Form 6252. The gain from 4797 is not going anywhere on the 1040, and it is wanting me to put the payments received on the 6252, but wouldn't it not go there since it would all be taxable the year of sale? What am I missing? 

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11 minutes ago, JackieB said:

Hi! 

. . . . . . but wouldn't it not go there since it would all be taxable the year of sale? What am I missing? 

This is a double negative so not sure what you mean?

Follow the instructions and completely fill out Lines 1 thru Line 26 on Form 6252. If you do that, everything should flow to the proper places.

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31 minutes ago, Corduroy Frog said:

Jackie if what you say is true, the selling price is less than the purchase price.  I don't know where you live, but this is quite unusual unless he hasn't done any upkeep, or sold to a relative.  I would question your client.

Good Point, In addition if it was sold at a loss, I don't believe Form 6252 applies since it would n't be an installment sale.   NEI

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Hi - so I have figured out that yes, it would be all taxable in one year if it was 1250 ordinary income recapture. However, because we took straight line depreciation it is not ordinary income recapture and the 1250 gain even though the entire gain is from depreciation recapture, it will still be done on the installment method and take portions of the gain each year. 

So many rules to keep track of :P

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1 hour ago, JackieB said:

Hi - so I have figured out that yes, it would be all taxable in one year if it was 1250 ordinary income recapture. However, because we took straight line depreciation it is not ordinary income recapture and the 1250 gain even though the entire gain is from depreciation recapture, it will still be done on the installment method and take portions of the gain each year. 

So many rules to keep track of :P

How is all the gain related to depreciation recapture? You don't have any basis allocated to land?

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If you took straight line, there is no depreciation recapture.  Instead, basis is reduced by the amount of depreciation allowed/allowable, increasing capital gain.  Accelerated depreciation is recaptured and gain taxed as ordinary income, but that's not the case with your client.  And yes, part of the gain will be taxed each year.  At this point I wouldn't worry about the land.  If the entire property was depreciated, too much depreciation was taken so gain in increased.  If you went back and figured proper depreciation, land basis wouldn't change so the end result should be similar.

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I put the extinguishment of installment sale items in the following order:

  1. Depreciation recapture of S. 1245 property.  Many times rental real estate has section 1245 property (such as large appliances) which bear more rapid depreciation than building components.  IMMEDIATELY TAXABLE - No installment advantage.
  2. Depreciation recapture of S. 1250 property which is in excess of Straight line.  IMMEDIATELY TAXABLE - No installment advantage.
  3. Section 1250 gains allocable to S/L depreciation.  Eligible for installment treatment.  Software has a bucket for this if we just look for it.
  4. Pure capital gains on remainder of assets not mentioned above.  Eligible for installment treatment.

Over the course of years, the above items may be relinquished in the order described.

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