Error in the handling of Sect 1250 recapture

[coppens1]

Dear Sir/Madam, I have found what appears to be an error in the handling of Sect 1250 recapture.  If you enter the information (including $35000 Straight line Deprec)  to pg 2. Form 4797, and indicate on line 26a that no additional depreciation was taken, there should be no Sect 1250 recapture of the $35000 depreciation taken.  Yet, on Sched D, line 19, the $35000 appears and recapture is taken.  

Please explain.  JC

[Carl]

I'm not seeing or understanding the problem here, as I"m making assumptions since I don't have the whole picture. I assume you sold rental property.

In the year of sale you are required to recapture the depreciation and pay taxes on it. Basically, one way to look at it is that the recaptured depreciation lowers your cost basis. Another way to look at it is that the recaptured depreciation is added to your sales price. So *exactly* what is wrong here? Again, I don't see a problem because you haven't provided enough information to give the reader the whole picture here.

[tagteam]

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@coppens1 wrote:
.....indicate on line 26a that no additional depreciation was taken, there should be no Sect 1250 recapture of the $35000 depreciation taken.  Yet, on Sched D, line 19, the $35000 appears and recapture is taken.  

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It is confusing because Line 26a is for additional depreciation, which is the excess of actual depreciation over depreciation using the straight line method.

"Recapture" still applies to depreciation allowed, or allowable, using the straight line method (which is what you are seeing).

[coppens1]

Here is the info on Sec 1250 recapture:

"https://www.investopedia.com/terms/d/depreciationrecapture.asp
Unrecaptured Section 1250 Gain
Depreciation recapture on real estate property is not taxed at the ordinary income rate as long as straight-line depreciation was used over the life of the property. Any accelerated depreciation previously taken is still taxed at the ordinary income tax rate during recapture. However, this is a rare occurence because the IRS has mandated all post-1986 real estate be depreciated using the straight-line method. Part of the gain beyond the original cost basis is taxed as a capital gain and qualifies for the favorable tax rate on long-term gains, but the part that is related to depreciation is taxed at the unrecaptured section 1250 tax rate specific only to gains on real estate property. The unrecaptured section 1250 tax rate is capped at 25% for 2019."

The depreciation taken was straight line.  Now do you see the problem?

[coppens1]

But The $35000 straight line depreciation is already taken into account in  the basis of the property.  If there is 0 accelerated depreciation, there should be zero recapture.  The gain is already taxed.  

[tagteam]

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@coppens1 wrote:

But The $35000 straight line depreciation is already taken into account in  the basis of the property.  If there is 0 accelerated depreciation, there should be zero recapture.  The gain is already taxed.  

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Yes, but your basis is reduced to the extent of depreciation deductions (straight line) taken and that reduction is taxed at a different rate than long-term capital gain (at your ordinary income tax rate up to a maximum of 25%).

[AmeliesUncle]

Tagteam is correct.  The software does it correctly.

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@coppens1 wrote:

The gain is already taxed.  

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Yes.  But what you see on Schedule D isn't taxing it AGAIN, it is just taxing it in a different way (different rate).