Real Estate Depreciation Recapture - Section 1250 Gains
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- Опубликовано: 22 авг 2024
- The sale of rental real estate assets will generally result in depreciation recapture. Depreciation recapture occurs because the depreciation expense taken over the asset's life is a reduction to the asset's adjusted cost basis.
If the property used in a trade or business is held for at least one year before it is sold, the gain will generally qualify for Section 1231 treatment. Section 1231 is the best of both worlds for a taxpayer because the gains are treated as long-term capital gains, while any losses can be treated as an ordinary loss.
Within the Section 1231 amounts on the sale of real estate, there is often unrecaptured Section 1250 gain, which is a long-term capital gain, but it is subject to taxes at ordinary income tax rates, capped at a maximum of 25%.
In this video, I cover an LLC partnership example where we have a Section 1231 gain with unrecaptured Section 1250 amounts and varying applicable tax rates for different individual investors.
For the other videos covering these topics, check below:
1. How to Record Sale on Form 4797: • How to Complete IRS Fo...
2. Nonrecaptured Section 1231 Losses: • How to File IRS Form 4...
For a larger database of tutorials, please visit our website and search for your question:
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This is a great explanation. I have to teach this every year to new staff at my firm. I could just link this video but I must remain relevant for nine more years when I retire😎
Actual forms and boxes... thank you for showing the details
You're welcome!
Thank you for the video. I knew how the numbers were supposed to come out, in concept. But I was going around in circles as to how to fill out the pertinent IRS forms, because of the double confusion of the two types of 1250 gain, and the fact that depreciation taxed at ordinary income rates can still have the status of capital gain.
Glad to hear it was helpful. Thank you for watching!
Always great! Thanks, Jason!
Hi Jason,
Great video!
Trying to find the correct answer on this. Have a like kind exchange dating back to 1979 property. If I unwind this by selling the acquired property from 1991 in 2023, I will have depreciation taken on Section 1250 property since 1991 to recapture. The original property business portion used the 200% declining balance method of depreciation from looking at my original scratch pad notes. The business property acquired under the 1031 Starker Delayed Exchange was depreciated over 31.5 years straight line.
My CPA firm did a workup on this about 4 years ago. I see differing footnotes. One footnote says, "depreciation taken 1991 forward. Recapture depreciation taken 1997 forward."
I have been following this workup and will have about $44,000 of depreciation to recapture since 1991. My understanding is that this taxed at a flat rate of 25%. But now I am confused about this 25%. Am I taxed as ordinary income on the straight line depreciation taken or allowed up to the max of 25% or at the entire 25% rate? Was the accelerated depreciation taken on the former property from 1979 to 1991 taken into account by adjusting my cost basis when the new property was acquired in 1991 or is this accelerated depreciation now subject to recapture at a flat rate of 25%.
I have read some blogs that say it is a max of 25%. Completing the forms are extremely baffling to me. I'll let the CPA firm complete this along with the related forms if the house is sold this year. There won't be any tax on the sales of the home for the principal portion that was not business related as it will be under the $500,000 exclusion.
So I am just trying to know what line on the Federal 1040 that this 25% recapture depreciation tax will eventually flow from all of the associated forms and schedules when the software will do this for the CPA.
The last part is what about the capital gains tax on the sale of the property that was allocated to the business portion? On their workup it just said it was under the $500K exclusion amount. But wouldn't this be solely for the portion that was not business related for the personal exemption. Wouldn't we have to pay capital gains tax on the business portion of the gain over the adjusted cost basis that goes all the way back to the original 1979 property?
So I think I have to pay capital gains tax on the adjusted capital gain at a max rate of 20% and ordinary income tax at my effective tax bracket with a top rate of 25% on the unrecaptured Section 1250 property.
Am I correct or incorrect on this?
Trying to find the Cliff Notes answer, but so far no luck.
What line will the unrecaptured Section 1250 be placed on the Form 1040?
Thank you Jason!!
I love this guy
¡Gracias!
Thank you for the support!
what if the unrecaptured section 1250 gain is more than the section 1231 gain? meaning the depreciation recapture is more than the net gain on the property
I rented out a room in my house and claimed income from the renter on sched E, which i offset with depreciation deductions. The house has always been my only residence. According to the worksheets in pub 253, i will be eligible for the entire 250k exclusion as a single file when i sell my home, and I won't have to figure depreciation into that amount, so I won't have to pay any capital gains up to 250k. But I can't find a definitive statement from the IRS regarding any depreciation recapture for what i claimed on sched E.
Is there any IRS info that addresses this type of situation? I'm assuming I wouldn't receive a k-1 upon sale of the home since its not a business asset and not considered rental property, as far as I can tell. So I'm guessing the depreciation wouldn't be reported anywhere upon sale? Or am i missing something?
Thanks for your great videos, I've learned a lot!
You only get a K-1 if you have a partnership and that partnership files a 1065. If you took depreciation to offset some of that rental income, you may still be to subject to depreciation recapture when you sell. Just an FYI.
@noskillnochill Also my situation. How did it finally work out?
Hi Jason what happens if a taxpayer hasn't taken depreciation on a property and can't amend for all the years? Would it just be a matter of filling out a 3115?