Sale of Rental Property

[irongirltx]

I'm still having issues with TT calculating the gain on the sale of rental property.  Gains should be taxed at 15% and TT is calculating tax at 20%!!  Before I enter the sale of my rental property, TT has calculated a refund of approximately $2,000.  After I enter the sale information, TT is saying I have a long term gain of $32,000 - which I somewhat agree with.  But TT is calculating my taxes due of $4,400!  That's a tax of $6,400 on a $32,000 long term gain.  Based on everything I read on the IRS website, the tax rate should be 15% or $4,800 which would net to a tax due of $2,800.  Does the tax rate need to be updated in TT to meet the IRS codes?

[Carl]

I haven't looked yet. But before asking for more details from you, are you taking into account the depreciation recapture? Recaptured depreciation is taxed anywhere from 0% to a maximum of 25%.

Also, look at your total AGI which includes the gain on your sale. If your income falls in the lowest two tax brackets, your capital gains rate is zero percent. When you start paying taxes in the third bracket, the capital gains tax rate goes up to 15 percent. If you're in the top tax brackets, you'll pay a 20 percent capital gains rate. If your income is $200,000 or higher if you're single or $250,000 or higher if you're married, you'll have to pay a 3.8 percent Medicare surcharge.

[irongirltx]

Carl -

I've been looking thru all the forms, but I'm not seeing any depreciation recapture and I just did straight line depreciation - so there shouldn't be any 1250 recapture.  My AGI with the capital gain is about $90K this year.  What form is the depreciation recapture shown on?  I've looked at form 4797 Part III lines 26 and it shows $0 except for the gain.  I'm thoroughly confused by what TT is doing.  Appreciate your help!

[tagteam]

---

@irongirltx wrote:

I've been looking thru all the forms, but I'm not seeing any depreciation recapture and I just did straight line depreciation - so there shouldn't be any 1250 recapture.  

---

Yes, but there is "recapture" and it is not dependent upon the depreciation method; you have unrecaptured section 1250 gain (since you have a net Section 1231 gain) and that, as Carl mentioned, can be taxed at a maximum of 25%.

[Rick19744]

@tagteam is correct and this is a confusing area.

There are two components here:

• Section 1250 recapture - this is gain attributable to depreciation taken in excess of straight line depreciation and is taxed at ordinary income rates.  Since rental real estate depreciation has been mandated as straight line since 1987, you would not have any of this.
• Unrecaptured Section 1250 gain - this is any gain attributable to depreciation taken on the rental real estate including straight line depreciation; since you do not have any recaptured Section 1250 all your depreciation will be considered Unrecaptured Section 1250 gain.  

Just wanted to add a little clarification to this confusing area.

[Carl]

One thing that I discovered last year that I've had back-arse-wards before that, was that I was thinking the recaptured depreciation was subtracted from the cost basis and increasing the taxable gain that way. I've since discovered I was wrong. The fact is, the cost basis isn't reduced. Instead, the recaptured depreciation is added to the sales price, thus increasing the taxable gain that way.

So if your sales price plus the recaptured depreciation is equal to or less than your cost-basis, there's no tax on the recaptured depreciation.

[tagteam]

The way Form 4797 is designed, depreciation, allowed or allowable, actually reduces the basis. 

Also, if a taxpayer has no Section 1231 net gain, there is no unrecaptured Section 1250 gain.

[marcisikoff]

Section 1250 sales (e.g., real estate sales) can be tricky.

Section 1250 recapture has 2 components:

Pre-1986 (might have year slightly off) excess of accelerated depreciation over straight-line is taxed as ordinary income e.g., your prevailing tax rate.

The other side of this is that your straight line depreciation taken is recaptured at a maximum 25% tax rate while the remaining gain is taxed as capital gains.

[marcisikoff]

To be sure open up the Schedule D tax calculation form which shows how the capital gains are falling out at each level of 0%, 15%, 20%, and 25%.

If your real estate was post-1986 (e.g., bought later), you would have any gain be capital gains calculated by Sales (less commission and selling expenses) less Adjusted Basis (which is basis as purchase price, less any depreciation taken or allowed to be taken).

[StoddardV]

I too am mystified by Recapture.

I sold rental property in 2020 and have accumulated depreciation of 98,000 (details below). I would expect to see some tax impact for Recapture. Turbotax shows Unrecaptured section 1250 Gain of 56,211.  This 56,211 Is also reported on Schedule D Line 11.

So from this it looks like TT is treating this just like a long term gain. And not using the 25% rate for Depreciation Recapture.  Why is this?

(Also, my Taxable Income is 0$ due to other unrelated deductions - maybe this is a factor)

Here are details....

My Estimate of Taxable Gain to Reconcile with TT
Sale Price	452,000
Sell Costs	29,807
Net	422,193
Adj Basis	464,842
Acc Depr	98,859
Basis Less Depr	365,983
Taxable Gain	56,210

[tagteam]

@StoddardV 

Your income is a factor and the 25% rate is the maximum tax rate applied to recapture.

[marcisikoff]

Don't be mystified; we're here to help.

As you got the sales amount less the expenses of sale and you got the basis less depreciation right.

That is the basis of the gain.

Depreciation is recapture to the extend of depreciation taken (or could have taken) or the gain whichever is less.

Since your depreciation is greater than the recognized gain, the entire gain is realized as Sec 1250 recapture as there's no gain left to attribute to capital gains.

[StoddardV]

Thanks. So 25 is the maximum - OK...

But, if not the maximum, what determines the rate if it is not the max 25%? 

[StoddardV]

OK, but what has me confused is the while TT reports the 56,211 on the "Unrecaptured Section 1250 Worksheet", the same amount is also carried forward to Sched D and being counted as a Long Term Capital Gain. Thus this 56,211 is being taxed as a LTGN.  Is that correct?