Schedule K-1, box 9c & Box 10 causing double gains reporting

[MRehberg]

I have equal amounts being reported in both box 9c and Box 10 reporting the sale of a partnership.  All of my net 1231 gain is also unrecaptured 1250 gain.  In Turbo Tax, my income summary lists my capital gains as the sum of both of these numbers - making my income too high and therefor my taxable income too high.  How can I only report the true amount of gain accurately if both of these boxes contain the same numbers?  Is there a way to get the capital gains to show as this number... not double the number?

[MRehberg]

Add-on:  It appears that the gain is being listed on Form 4797 AND through Schedule D for long-term gains - this is causing the doubling.  Is it safe to delete Form 4797...appear to be the only way to correctly state my income/gains.

[DaveF1006]

You have both Section 1250 and 1231 gains from this transaction. 

Capital gains on certain section 1250 property are subject to a maximum capital gains tax rate of 25%.

Unrecaptured Section 1250 gain is long-term capital gain, not otherwise recaptured as ordinary income. This type of income is attributable to prior depreciation of real property that was held for more than one year.

Review the documents you received with your Schedule K-1 for information about how much of the gain from the sale would be considered Section 1250 gain, if any.

So no, this reporting is correct so don't delete your 4797 because this is reported correctly.
 

[MRehberg]

Ok - I didn't think it made sense to just delete that form either.  But, is it considered correct then that TT is doubling the amount showing as capital gains?  I'm not sure how to get that to only show 1 times the amount, even though it is considered both a 1250 & a 1231 gain.  It is affecting my AGI number and really increasing my tax due.    

[DaveF1006]

No Turbo Tax is not doubling up on the income unless the income is different from the information recorded on your K1. 

[MRehberg]

thanks again Dave...I really do appreciate the help.  I want to clarify though - are you stating that if my Schedule K-1 has an amount (let's say $5k) showing as Unrecaptured section 1250 gain (Box 9c) and the exact same amount also showing in Box 10 for Net Section 1231 gain (both of these are equal to the total gain) that Turbo Tax will add them together to show capital gains of $10k and thereby include both gains as an addition to my taxable income?  Basically - even though my total gain from the sale is $5k, TT will show my capital gains of $10k because the gain is both 1231 and 1250?  Is that right?  Thanks again - I don't mean to be slow on the take - but this whole process is making me think I'll just pay to have them done for me going forward...maybe TT isn't sufficient in handling these types of things.  

[DaveF1006]

Let me do a scenario with you that illustrates how this can occur. 

1. Imagine an investor buys an $800,000 real estate property with a 40-year useful life(this is hypothetical only). Five years later, employing the accelerated depreciation method, this investor claims accumulated depreciation expenses in the amount of $120,000, resulting in a cost basis of $680,000.
2. Let us further assume that this investor unloads the property for $750,000, resulting in a $70,000 total taxable gain. Due to the fact that the accumulated straight-line depreciation amounts to $100,000 (the $800,000 initial price, divided by 40 years, multiplied by five years of use), the Internal Revenue Service must then tax $20,000 of the actual depreciation exceeding straight-line depreciation, as ordinary income. The IRS would subsequently tax the $50,000 that remains of the total gain, at applicable capital gains tax rates.
3. Under Section 1250, the recapture of gain as ordinary income is restricted to the actual gain recorded on a real property sale. In our example, if the investor unloaded the real property for $690,000, thereby producing a gain of $10,000, the Internal Revenue Service would only categorize $10,000 as ordinary income, not the additional $20,000.

If we apply the above scenario to your case, it sounds like your total gain was $10,000. Your 1250 ordinary gain was $5K because of a difference between the actual depreciation taken vs the depreciation that would have been taken if the straight-line method was used. The remaining $5K is capital gains. The good news in all this is that your capital gains is taxed at the capital gains rate.

[jmhart49]

Two questions-

I sold an MLP last year that was a long term loss. It does not have detail in boxes 9 or 10. My confusion is how to handle the 'gain subject to recapture as ordinary income'. The Sales Schedule tells me to put the amount as negative in col G of form 8949. It also tells me to put the amount in line 10 form 4797 but is not clear if that should be a negative or positive.

I sold another MLP last year that was a short term gain. The Sales Schedule tells me to put the same as negative in col G of form 8949 but it does not even mention form 4797. Shouldn't I be doing both the same?

[RobertB4444]

When you sell your interest in a partnership the portion of the sale that is taxed as ordinary income is the reduction in basis due to depreciation.  If there is no detail on your K-1 in boxes 9 or 10 I am not sure why you think that you have this recapture.  Based on the instructions that you received with your K-1 it seems like you have capital gains to enter into form 8949 which may or may not carry over to form 4797.  However, if they are coded properly on your K-1 then the numbers should be carried over onto the proper forms just fine.  You shouldn't have to worry.  If they're not coded properly you should complain to the partner issuing your K-1.

[4eyedmo]

A follow-up to this question, if I may: I'm also having issues with boxes 9c and 10, though my situation is also somewhat different. 

In the K-1 provided by the accountant who worked on the sale, the sum of boxes and 9c and 10 exceeds the total amount of the sale. He said (quoting from an email), "The Section 1250 gain (line 9c) claims priority in this situation, so the $XXXX will be the full Section 1250 gain. Line 10 (the 1231 gain) will be netted against the 1250 gain, so the remaining amount will be the 1231 gain. In this case, you would subtract the 1250 gain ($XXXX) from the line 10 amount to get the Section 1231 amount ($XXXX)."

This makes sense to me, since (as mentioned above), adding the two would yield a number that was way too big. The total gain would be split into the part that can take advantage of the 1250 provisions and the part that cannot... though in our case, I don't believe that distinction matters. 

But here's the problem: if I enter the numbers into the TurboTax K1 form, as they appear in the Schedule K-1 provided by that accountant, I get a number that is way too high (as measured by the change in the "Federal Tax Due" window). But if I put the difference into the form instead, the result is much closet to what I expected, but it also seems too low... or maybe I'm not calculating my expected liability correctly. 

We are married, filing jointly, and our taxable income falls within the $80,800 to $501,600 window. So I'm expecting for the "Federal Tax Due" to go up by 15% of the gain in line 10. Since the accountant's instruction was to subtract line 10 from line 9c to net the 1231 gain against the 1250 gain, and I believe that in our income bracket and situation the two should be treated the same, the line 10 number is my guide since [line 10 -  line 9c] + line 9c] = line 10

Have I missed something (i.e., a reason why our tax liability should be less than 15% of the gain), or is there something different I should be entering into TT in order to force the tax owed to increase by the expected amount?

 Thanks!

[artshep]

I won't comment on whether your software is correctly or incorrectly applying your K-1 information, but the key concept to understand is that "unrecaptured 1250" gain is a sub-category of "net 1231" gain. In other words, these are not mutually exclusive categories that are added together to obtain your total gain. Rather, the number in box 9c (unrecaptured 1250 gain) represents the amount of your 1231 gain that was categorized as unrecaptured 1250 gain. That's why they are the same number, i.e., all of your 1231 gain is categorized as unrecaptured 1250 gain and is therefore taxed at 25%. 

This link provides a very comprehensive, but easy to follow, explanation:

https://www.forbes.com/sites/anthonynitti/2015/07/14/tax-geek-tuesday-the-different-types-of-gain-ma...