How to enter an installment sale of a Rental property, which was sold in a prior year (2017 not using turbo tax) How do I enter the installment sale in Turbo Tax?

[tj-21]

I am trying to enter an installment sale for a rental property I sold in 2017. I had an accountant do the last several years of returns, and would like to do them myself now.

When I enter this using  installment sales, it doesn't ask for depreciation, the only way I can get the gross profit margin correct is to subtract the depreciation. When the form 6252 is populated, the info in Part 1 is not the same as the year of sale, I am able to correct the fields to match the year of sale. The "big" problem is the amount from line 26 should be transferred to form 4797 and Schedule D line 19 (Unrecaptured Section 1250 Gain Worksheet), but it is not transferred. It is using the line 20 Qualified Dividends and Capital Gain Tax Worksheet, which is incorrect. I need to recapture the 1250 gains up to 25% to the amount of my depreciation, after that then the remaining gain is at the Qualified Dividends and Capital Gain rates. How do you get this corrected? I looked at the 1250 Unrecaptured Section 1250 Gain Worksheet and it is blank. I can add the amount but I have to override it. I'm told you cannot override things in Turbo Tax, if you do you can't e-file. I am using the Desktop CD download Home & Business.

Appreciate any help!

[tj-21]

I am trying to enter an installment sale for a rental property I sold in 2017. I had an accountant do the last several years of returns, and would like to do them myself now.

When I enter this using  installment sales, it doesn't ask for depreciation, the only way I can get the gross profit margin correct is to subtract the depreciation. When the form 6252 is populated, the info in Part 1 is not the same as the year of sale, I am able to correct the fields to match the year of sale. The "big" problem is the amount from line 26 should be transferred to form 4797 and Schedule D line 19 (Unrecaptured Section 1250 Gain Worksheet), but it is not transferred. It is using the line 20 Qualified Dividends and Capital Gain Tax Worksheet, which is incorrect. I need to recapture the 1250 gains up to 25% to the amount of my depreciation, after that then the remaining gain is at the Qualified Dividends and Capital Gain rates. How do you get this corrected? I looked at the 1250 Unrecaptured Section 1250 Gain Worksheet and it is blank. I can add the amount but I have to override it. I'm told you cannot override things in Turbo Tax, if you do you can't e-file. I am using the Desktop CD download Home & Business.

Appreciate any help!

[gloriah5200]

An installment sale occurring in a prior year is filed on IRS Form 6252 providing all information on the sale in order to calculate the gross profit percentage to be used in later years.  

In the years after the initial year of sale, then the gross profit % is used against the principal received during the year and the interest income received during the year is reported as income.

For additional information, please refer to the following link:

IRS Form 6252 and Instructions for Installment Sale

Any ordinary income recapture under section 1245 or 1250 (including sections 179 and 291) is fully taxable in the year of sale even if no payments were received.

To figure the recapture amount, complete Form 4797, Part III.

The ordinary income recapture is the amount on line 31 of Form 4797. Enter it on line 12 of Form 6252 and also on line 13 of Form 4797.

Don’t enter any gain for this property on line 32 of Form 4797.

If you used Form 4797 only to figure the recapture amount on line 12 of Form 6252, enter “N/A” on line 32 of Form 4797. Partnerships and S corporations and their partners and shareholders, see the Instructions for Form 4797.

[tj-21]

Gloria,

I understand everything you said, except that on a 1250 property that used Straight line depreciation there is no recapture in the year of sale when using the installment method. Each year the amount on line 26 of the form 6252 is applied to the 1250 unrecaptured Gain until it is fully used(deprecitation) up then it goes to the capital gains rates.

My main issue/concern is by using the installment sale, as instructed, it is not reporting the gain under Schedule D line 19. This is incorrect, the 1250 unrecaptured gain worksheet is blank.

If there is another way to add the installment sale in turbo tax please advise.

[ReneeM7122]

Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus "recaptured" by reporting it as ordinary income. Depreciation recapture is reported on Internal Revenue Service (IRS) Form 4797.

To account for the recapture, you should incorporate Form 4797, sale of business property to your return.

To add Form 4797:

1. Search for 4797, sale of business property and click the Jump to link.
2. On the Any Other Property Sales? screen, select the first checkbox and click Continue.
3. Follow the instructions to complete the form.

@tj-21

[caisson1]

In reference to tj-21's comment, it seems selling section 1250 property on an installment sale which used straight line depreciation does not recapture depreciation. I found the following  in Pub. 537. Not sure if it applies. 

Regarding  sec.1250 property, "There’s no depreciation recapture income because the building was depreciated using the straight line method."

[DaveF1006]

It depends. I looked in publication 537 and found this. If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. This is on page 6 of the publication. 

This is listed in black and white and doesn't make a distinction for section 1250 property.

[caisson1]

@tj-21 Your answer looks correct regarding no recapture of depreciation in the year of the installment sale, when a straight line depreciation was used for a section 1250 property.  It is also correct that you end up paying tax on that unrecaptured depreciation in each year that income is received on the installment sale based on the Gross Profit Percentage.  This is accomplished because the GPP is higher than it would otherwise be if you were able to recapture the depreciation and put it on line 12 of 6252 as instructed. 

Regarding part  III of form 4797:

I can enter the amount of allowed or allowable depreciation on line 22 and 24 but it stops there.

There is no way to get line 31 to show the recaptured depreciation amount because you can not get line 26g to show  anything but zero.  This is because line 26 states "if straight line depreciation was used, enter -0- on line 26g. 

Can anyone confirm or show me where I'm wrong?  Thanks!

[norm927]

Do I need a Form 4797 if I only owned the one rental and it was NOT classified as a business? But I did sell it this year using a 3 year installment plan?

[DaveF1006]

Yes, you may need to use Form 4797 to report the sale of your rental property, even if it was not classified as a business. Here's why:

1. Rental Property Sales: The IRS thinks rental properties are like investment properties. If you sold a rental property, you usually report it on Form 4797. This form is used to report gains or losses from the sale of business or income-producing property.
2. Installment Sale: Since you sold the property in 3 years, you'll also need to report the sale on Form 6252 (Installment Sale Income). This will help you figure out how much of the gain you'll report each year as you get payments.
3. Depreciation Recapture: If you claimed depreciation on the property while it was rented, you may need to account for depreciation recapture, which is reported on Form 4797. This is taxed as ordinary income.
4. Capital Gains: Any remaining gain after depreciation recapture is typically reported on Schedule D (Capital Gains and Losses).

To summarize:

• Use Form 4797 to report depreciation recapture and any gain or loss from the sale.
• Use Form 6252 to report the installment sale.
• Use Schedule D for any capital gains.

As an FYI, Form 4797 is generated when you report the sale of the rental in the rental property section of your return. Installment sales are reported by going to  Less Common Income > Select Installment Sales (Start/Update) in the income section of your return. Schedule D is automatically generated when your capital gains is determined after you report yoursale.