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Installment sale - depreciated assets - ATX - 1065


jasdlm

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Sales price $150,000; Basis $200,000; Depreciation $80,000; Gain (after selling expenses, etc.) $30,000.  I know I'm tired, but why is ATX not recapturing all $30k in the current year.  I feel like my brain is shut down.  $5k paid in 2022 toward installment.  Used bulk disposition, installment sale, 1250 property.  What am I either doing wrong or not thinking about correctly?

Is my brain the only one not working?  Is that just an excuse I'm making?  100 hour work weeks for 10 weeks ... I'm hitting a pretty big wall :(.

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  • jasdlm changed the title to Installment sale - depreciated assets - ATX - 1065

@jasdlmYour depreciation recapture is greater than your gain, and all depreciation recapture is required to be recognized in the year of sale, even if you are doing an installment sale.   So I think you should have $30K net gain reported on the return.   I think you should elect to report all gain in the current year since it is going to come out that way anyways.  Double check me, this is off the top of my head and I don't have time right now to look it up to be sure.

Tom
Longview, TX

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Thanks so much to both of you for replying.  Yes, I've completed the 6252.  I didn't think about simply 'electing to report all gain'.  I still feel like I'm doing something wrong in the entry, but that's a work around I wasn't smart enough to consider.

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If you want to report the entire 30K gain this year, don't use 6252, just report gain on 4797.  

If you do want to report as installment the 5K received this year first calculate how much of it is interest income.  Then remaining is 80% tax free return of capital (120/150) and balance is 1250 gain.

I don't use ATX, so I don't know how you enter it to get this result. 

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41 minutes ago, jasdlm said:

Tom, do you use ATX?  Where do I make that election?

Like @kathyc2 said above, you elect out by reporting all the gain on the 4797 on a timely filed return (including extensions).   

Out of curiosity,  what are the numbers on your 6252 lines 5 thru 14?   I think it should go like this:

Line 5 - 150K
Line 6 - 0
Line 7 - 150K
Line 8 - 200K
Line 9 - 80K
Line 10 - 120K
Line 11 - 0
Line 12 - 30K
Line 13 - 150K
Line 14 - 0

The form says if Line 14 is Zero, don't complete the rest.   That is because all the gain is "absorbed" by the 4797 amount reported on Line 12.

Tom
Longview, TX

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4 minutes ago, jasdlm said:

It's all as you list, Tom, until line 12.  ATX is populating line 12 with 0 and line 14 with the $30,.  I must have something toggled incorrectly.  Grrrrr.

 

Thanks!

More than likely it should be zero.  Read the instructions for 4797 Part III line 26 to see if anything should be on those lines.  If not, you are good.

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19 minutes ago, kathyc2 said:

If straight line depreciation and no bonus depreciation then line 12 is 0, line 13 is 120 and line 14 is 30.

5 minutes ago, kathyc2 said:

More than likely it should be zero. 

Why?   What am I missing.   The gain on the property sold is all related to depreciation taken which was deducted against ordinary income, therefore must be recaptured and taxed at ordinary rates?   Is there another rule I am forgetting at the moment?

Tom
Longview, TX

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1 minute ago, BulldogTom said:

The gain on the property sold is all related to depreciation taken which was deducted against ordinary income, therefore must be recaptured and taxed at ordinary rates?

Correct.  A lot of us (myself included) use the term recapture loosely. See the instructions for 4797 Part III line 26.  Line 12 on 6252 pulls from line  31 of 4797.  If straight line was taken, line 31 will be zero.  The gain can be taken over the like of the installment note. 

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Kathy, if you were here right now, you would get a giant hug, and NOT a RITA hug! 

Kathy and Tom, I can't think either of you enough.

I just made another double espresso.  Here's hoping it helps.

When I hit the door of my Church tomorrow morning, my first prayer will be one of gratitude for my colleagues on this board.

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One more thing.  THIS is why I never like to override the software ... especially when I'm tired!  I spend hours trying to figure out why things aren't flowing as I expect.  Sometimes it's the software, but sometimes, unfortunately, it's the user.

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2 hours ago, kathyc2 said:

Correct.  A lot of us (myself included) use the term recapture loosely. See the instructions for 4797 Part III line 26.  Line 12 on 6252 pulls from line  31 of 4797.  If straight line was taken, line 31 will be zero.  The gain can be taken over the like of the installment note. 

The gain is less than the depreciation so it all has to be taken this year. Doing an installment sale will not help.

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2 hours ago, Abby Normal said:

The gain is less than the depreciation so it all has to be taken this year. Doing an installment sale will not help.

I disagree.

453(i)

(1)In general

In the case of any installment sale of property to which subsection (a) applies—

(A)notwithstanding subsection (a), any recapture income shall be recognized in the year of the disposition, and

(B)any gain in excess of the recapture income shall be taken into account under the installment method.

(2)Recapture income

For purposes of paragraph (1), the term “recapture income” means, with respect to any installment sale, the aggregate amount which would be treated as ordinary income under section 1245 or 1250 (or so much of section 751 as relates to section 1245 or 1250) for the taxable year of the disposition if all payments to be received were received in the taxable year of disposition.

 

What you are describing normally happens with 1245 property.  If 1245 property sells for less than original cost but more than basis, it is ordinary income and goes direct from 4797 to 1040, bypassing Sch D.

Since generally 1250 property is depreciated with straight line it is a gain and not ordinary income.  The confusion comes because it is taxed at the higher of marginal rate or 25%.  However, it is still a capital gain and goes from 4797 to Sch D before showing on 1040.  

If the TP happens to have net capital loss from a mutual funds or such, they will decrease the 1250 gain.  They would not decrease the 1245 gain I talked about earlier because that is ordinary, not capital, income. 

 

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7 hours ago, jasdlm said:

.  I know I'm tired, but why is ATX not recapturing all $30k in the current year.  

 

7 hours ago, jasdlm said:

1250 property.

 

1250 gains are treated differently than 1245 gains and not subject to depreciation recapture in year one of installment sale.

 

 

1250 is sort of a hybrid, taxed at a maximum capital gain rate of 25%, thanks to the strong lobby arm of the real estate industry.

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