in schedule k1, how to categorize Box 10 - Net Section 1231 Gain as long term capital gain?

[AmeliesUncle]

Are you entering the K-1 on to your personal tax return?

It should automatically treat it a a long-term capital gain, unless you have non-recaptured Section 1231 losses that were carried over from prior years.

[leo-jyz]

Yes, It is for my personal tax return. 

I dont have non-recaptured Section 1231 losses, I have ordinary loss carriedover from previous year, but even with that, turbotax automatically apply short term tax rate to my Gain. 

[AmeliesUncle]

Are you SURE it is applying the short-term rate?  How are you arriving at that conclusion?

Assuming you are right that it is applying the short-term rate, sorry, I'm puzzled at why it is doing that.  Hopefully someone else will come along soon and be able to figure out why it is doing that.

[leo-jyz]

Yes, I’m sure. My marginal federal tax rate is 37%, and after I added the Section 1231 gain, I noticed the amount I owe to the IRS was increased accordingly. I had expected the increase to be at the 20% long-term capital gains rate instead. I’m trying to understand how TurboTax determines whether this is treated as a long-term gain. I was expecting a question like, “Was any of this gain from the sale of business or rental property held for more than one year?” but I didn’t see anything like that. There also doesn’t seem to be a place for me to adjust or clarify this manually.

[AmeliesUncle]

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@leo-jyz wrote:

 I noticed the amount I owe to the IRS was increased accordingly. I had expected the increase

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Don't only base it on what you owe.  You need to look at the entire tax return.  It is possible that the 'extra' income affected other things on the tax return (for example, phasing out some credits or deductions), resulting in higher tax based on those 'other' things.

I would need to double check, but I have stuck in my head that the definition of "1231 Gain" automatically includes the requirement that it is for over one year and part of a business (therefore it would not need to ask a separate question about it).  But as I said, I would need to double check to see if my memory is accurate.

I would also double check the worksheets within the program to verify that there isn't any non-recaptures 1231 losses that carried over.

Other than that, I'm out of ideas without actually seeing the tax return.

[Mike9241]

is there section 1250 recapture on line 9c . that's part of the 1231 gain. However, that can be taxed at up to 25% and another thing the gain may subject you to the Net Investment Income Tax and addition 3.8% in taxes n net investment income- see form 8960 

[leo-jyz]

Thanks for your response. 

While there isn't any non-recaptures 1231 losses that carried over, but I do have Unallowed Passive Losses in form 8582. When I Report Carryovers, I entered the negative amount in Box 2a and verified I see the tax amount decrease as ordinary income rate. but overall, the rest of gain is still in tax braket of ordinaray income. 

[leo-jyz]

there is empty on line 9c. the gain is now taxed in 37% rate as ordinary income...

[Mike9241]

is the 1231 gain flowing to form 4797 line 2 and then line 9a?

from there to line 11 on schedule D? then it is being treated as LTCG. why your taxes are increasing by 37%  is unknown, but additional income can affect many other items on your return

[Mike9241]

you can also compare your taxable income (line 15 of the 1040) with and without the 1231 gain. if no other item of income or deduction is being affected then the before and after amount should only increase by the 1231 gain. if it's not then you'll need to look at each line 1-15 to see which one changes. if it's line 8 you'll have to see which line on that schedule changes. If you post the line number (let us know  the line number id it's schedule 1)  perhaps, we can tell you why. if the line 15's doesn't change that means one of these lines on the 1040 changed

16,17,19,20,23,27-29,31 these would include changes to schedules 2 and 3.  we may me able to explain why if you post the line number and if a schedule the line and schedule number.