Are improvements to rental property reported as Section 1250 or 1245 on form 4797?

[CECPAD]

I am entering the sale of a rental property using TT Premier 2022 desktop.

I have a lengthy depreciation report going back 15 years.

On the Asset Entry Worksheet, these items are classified as Asset Type F- Rental Appliances, Carpet Furniture

All items were depreciated using SL method.

Some benefited from Special Depreciation Allowance (SDA), but not all.

The number of years varied from 7-27.5 years (depending on what previous accountants determined to be correct at the time.

• Air conditioners
• Pool Heater
• Carpet
• Fence
• Oven (built in)
• Ceiling Fans
• Pool Remodel
• Renovations
• Loan Fees

In the step by step instructions, TT asks if the property is:

• Property other than real estate that I took deprecation on (which flags it as Section 1245)
• Real Estate that I took deprecation on (which flags it as Section 1250)

Obviously the BUILDING is entered as Section 1250 real estate.  But what about all the other assets on my  depreciation schedule?  Are they also Section 1250 or are they Section 1245?

[Anonymous_]

Obviously, any improvements that are attached and affixed to your rental real property in such a manner as they become permanent components of the real estate are considered to be real property.

For the purposes of tax reporting, the goal should be to wrap as many of the components as possible into the Section 1250 bucket since the federal income tax liability on unrecaptured Section 1250 gain (aka depreciation recapture) is capped at 25%. There is no cap on gain from the sale of Section 1245 property (personal property); it is subject to ordinary income tax rates up to the maximum tax rate of 37%.

As a result, you would be better off if you simply wrapped as many components as possible into the gross sale price (i.e., as Section 1250 property) rather than allocating a portion of that sales price to separate components.

[Critter-3]

• Property other than real estate that I took deprecation on (which flags it as Section 1245)    everything else that is NOT 1250 property
• Real Estate  that I took deprecation on (which flags it as Section 1250)   and land + anything being depreciated at 27.5 years or more

[CECPAD]

That's very helpful, thank you!

I agree with your interpretation of "permanent components".  In real estate sales, anything attached to the home conveys with the property, unless specifically excluded in the contract.  But, one of the other replies suggests that anything that isn't depreciated at 27.5 years would be Section 1245.  Do you have any thoughts on that?

[Anonymous_]

---

@CECPAD wrote:

.....one of the other replies suggests that anything that isn't depreciated at 27.5 years would be Section 1245.  Do you have any thoughts on that?

---

Yes, you clearly understand real property law (e.g., "attached", "fixtures", etc.) but @Critter-3 is most likely correct with respect to federal income taxation in terms of how you treated the property for the purposes of cost recovery (i.e., depreciation). For property that had been treated as personalty when placed in service, you probably have Section 1245 property for the purposes of reporting a sale.

[CECPAD]

Thank you both!  I appreciate your help.

I can tell that both @Anonymous_ or @Critter-3  are very knowledgeable with TT.  Are either of you tax professionals?

[Mike9241]

here's my suggestion 

• Air conditioners
• Pool Heater
• Carpet
• Fence
• Oven (built in)
• Ceiling Fans
• Pool Remodel
• Renovations
• Loan Fees

loan fees - any balance should be written off because you can sell it

all others except the a/c and carpet (all others seem to be 1250 assets) if they're fully depreciated, delete them. my premise is that any proceeds allocated to then will result in 1250 recapture. i doubt any are worth more than their original cost.  thus, less proceeds to allocate to the land and building so less 1250 gain but in total the same. on the other hand, if not fully depreciated allocate enough sales proceeds less selling expenses to equal their tax basis.  it you do not indicate they were sold; their remaining tax basis will not be taken into account when figuring your gain and when you roll over 2022 to 2023 those assets will show up.

carpets - area carpets would be section 1245 assets. if fully depreciated delete them.  i would doubt they have any significant value, but the final determination needs to be yours.

  a/c - central ac would be section 1250 while window a/c could be 1245 or 1250 depending on how or if they are attached to the structure or sitting free.