4797 and sale of rental

[Margaret CPA in OH]

Client sold a rental 4th quarter of 2023.  I roughed up the gain by hand and now have input into the software. The last client that had a rental sale was in 2019 and the forms look a bit different but should still have similar result. 

Surprise! Part I line 2 shows PAL adjustment of -102,764.   This should be the gain of 1231 property and the worksheet for this shows the gain.  I cannot figure out how that became a loss.  It should be CG.  What am I missing?  They need to make a substantial Q4 payment on this gain to avoid being dinged.  Is it because the forms are still draft? I've reviewed the instructions again and still think I am right but don't know how to 'make it so.'

Any help would be appreciated and I can't believe I'm asking about something I've done so many times but here it is!

[Lee B]

Perhaps you have a passive loss carryover?

[kathyc2]

Why would this be 1231 property instead of 1250?  I would think it would be reported on Part III and then carry to line 6 of Part I.

Any passive loss released shouldn't show on 4797, but on Line 5 of Sch 1.

[Lee B]

The property can be both section 1231 and section 1250. Section 1250 refers to the taxation rules that apply if accelerated depreciation was used.

I have to refresh my memory ever time this comes up.

Maybe one day I will get it nailed down in my mind.

[Margaret CPA in OH]

The client has never had PAL's.  Usually there was small net income and never more than $25,000 loss so any loss was taken contemporaneously.  There was ordinary income from 1245 or 1250 depreciation recapture as there was none.  The remaining gain should be 1231 taxed as cap gains.  But this gain shown on 4797 Part III line 24 and Summary of Part III Gains line 30.  There is a small deduction from some small 1245 pieces with the full gain on line 32.

Well, I'll be d*****!  I finished lunch and just reopened this return, noting that 3 forms were downloaded at 2:43pm.  Form 8582, the missing link.  A thing of beauty which I completely missed that was missing.  All is now right with my little world with this client.  That Surprise entry up there?  Gone!  Without 8582, the data had no correct place to go so just landed in the wrong place.

It's unfair to make my brain work so hard at my age but I am so grateful for folks chiming in.  I was 90+% certain I was correct but...but... I hope this is the worst thing that happens this season!

[kathyc2]

51 minutes ago, Lee B said:

The property can be both section 1231 and section 1250

1231 property is used in a trade or business. 

[Margaret CPA in OH]

kathyc2, rental property such as this has remaining gain (after 1245 and 1250 dpn recapture) is 1231 and tax at cg rates if held more than a year.  This property was a business for the clients as a rental and fits the criteria for the treatment I expected and now have, thanks to 8582 and numbers going where they belong!

[DANRVAN]

2 hours ago, Lee B said:

The property can be both section 1231 and section 1250.

That is correct, I think of 1245 and 1250 as subsets of 1231 property.   Sec 1231(b)(1) includes property "of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year".

Section 1250 applies since 1250(c) states  "the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167."

Therefore,  the undepreciated portion of the building and land are taxed as capital gains.

Because of the above definitions, the rental does not need to rise to the level of a trade or business to be classified as either 1231 or 1250 property.