Turbo Tax Premier is not calculating recaptured depreciation correctly on an installment sale - am I entering something incorrectly or is this a flaw in Turbo Tax?

[AmeliesUncle]

We need more information.  WHY do you think it is calculating incorrectly?  What type of asset is it?  

The more details you can provide, the more likely somebody will be able to help you.

[mkuriger]

The asset is a single family rental home. It was rent all of 2020 and sold in December - contract is an installment loan.  Down payment of $20k with the remainder to be paid in 3 additional payments by the end of June 2021.  Turbo Tax calculates the gain on the down payment correctly, but does not show the full recaptured depreciation for 2020 - it is deferring it to 2021.  This is not correct. Tax laws says all of the recaptured depreciation must be captured in the year of the sale - 2020. 

[AmeliesUncle]

There is no "recapture" of depreciation when you sell a home.

The gain due to the depreciation is called "Unrecaptured Section 1250 Gain".  Unlike "recapture", Unrecaptured Section 1250 Gain is NOT taxed in full in the year of the sale.  It is taxed as you receive the payments.  

[mkuriger]

Then why does IRS Publication 537 state the following...,

Depreciation Recapture Income

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. Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. The recapture income is also included in Part I of Form 6252. However, the gain equal to the recapture income is reported in full in the year of the sale. Only the gain greater than the recapture income is reported on the installment method. For more information on depreciation recapture, see chapter 3 of Pub. 544.

The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Determining gross profit is discussed under General Rules , earlier.

[AmeliesUncle]

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@mkuriger wrote:

Then why does IRS Publication 537 state the following...,

Depreciation Recapture Income

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,

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As you pointed out, you need to report any depreciation recapture in the year of the sale.  But as I said before, the sale of your home (real estate) does not have any "recapture" of depreciation.  The gain from the depreciation is "Unrecaputured Section 1250 Gain", not "recapture".

[mkuriger]

I’m still confused!  This is a rental property- not my home.  I claimed $43k in depreciation since 2011. The property was sold in December 2020. Are you saying I don’t have to show ( recapture) this deduction as ordinary income?  Again, the property was sold with an installment contract - $20k down - remainder due by June 2021.

[AmeliesUncle · Accepted solution]

As I said before, there is no "recapture" of a home (any residential real estate) that took depreciation (with an extremely rare exception if you had a Home Office that was over 50% of your home).

Let's say you bought the property for $100,000 and sold it for $200,000.

It that scenario, your Adjusted Basis is $57,000  ($100,000 purchase price, minus the $43,000 of depreciation).  When selling it at $200,000, that would result in a gain of $143,000.

Of that $143,000 gain, $43,000 is "Unrecaptured Section 1250 Gain" (not "recapture"), which is taxed at your regular tax rates, up to 25%.  The other $100,000 is taxed at the long-term capital gain rates (usually 15%).

Does that help clarify it?

[mkuriger]

Yes, thank you. Because this is an installment loan, how does TT know how to tax each installment amount?  I know TT takes the gross profit divided by the sale price to determine a percentage to apply to the installment amount, but how does TT know how much should be taxed as ordinary income vs capital gain?  Thanks for all your help/clarification. 

[AmeliesUncle]

If you entered all of the information it asked for, it has all of the information to determine that.

[mkuriger]

I still like to understand the math...,