On the sale of real estate, when there is Section 1250 recapture (ordinary income) for the excess of accelerated depreciation over straignt line, is the balance of the long term gain taxed at 15% or 25%?
Why would you be using accelerated depr instead of Straight-line?
I believe the balance of the straight-line depreciation is recaptured at 25%, then any remaining gain is at 15%.
For residential real estate,100% of the excess depreciation is subjects to recapture. That is there is ordinary income recapture to the extent the depreciation allowed under the prescribed accelerated cost recovery method exceeds the recoverythat would have been allowable if the shraight line method over the ACRS recovery period had been used.If the straight line methodwas elected there is no recapture. All gain issubject to Section 1231 netting.
I think the keyidea is since thepropertyisfullydepreciated using straight line or the ACRS there is no ordinary income
If the prescribed accelerated method isused to recover the cost of nonresidential property, all gain on the disposition of the realty is recaptured as ordinaryincome to the extent of recovery allowances previously taken. Thus, nonresidential property will be treated in the same way as personal property for purposes of recapture if the accelerated recovery allowance was claimed.
There is a big difference in the treatment of recapture for residential property and nonresidential propertyand your question does not say which kind of real estate (residential or nonresidential).
Based upon the limited information we have on the property as far as residential or commercial, I would tend to agree with ArchieLeach until such time as you provide us with more information
1. The nonresidential property is section 1245 andif you use ProSeries Professional this will show on page 2 of form 4797.
2. The residential property is section1250 property, and what I said is quoted directly from J K Lasser's Your Income Tax page 681to 683. Iam trying to reconcile this with what ProSeries says about calculating the section1250 gain.
Pro Series, Help, Help Center for entering section1250 depreciation. Section 1250 Property For Section1250 property, you must enter the recapture information manually. When you calculate this you find the figure is 0.
Total the "deductions for the year" for the years after 1975 and enter the difference. Both of these totals are the full amount depreciated andthe differenceis 0. Earlier inthe paragraph it says Quick zoom to the assetlife history and for ACRS property the history shows the SL depreciation in the AMT column.
You need to look at the Schedule D tax worksheet, remembering Capital gains rates can vary depending on the income.In most cases the regular capital gain rate is 15% . Per the worksheet this is15% (of the captial gain less the unrecaptured section1250 gain on Schedule D Line 19). Then there is a complicated formula of 25% times (the unrecaptured Section1250 gain less some amounts) and the balance is taxed with tax tables or tax computation worksheet whichever applies.
The maximum tax from the Unrecaptured section1250 gain is 25%, but if the tax rates are lower for that income the tax rate is reduced to those lower rates.
If I understand correctly, then the gain on the sale of residential property placed in service in June 1985 is subject to tax at 25% up to the amount of depreciation taken.
Thanks to all for your answers. I appreciate your help.
It is a little more complicated because there might be capital gains at a lower rate. On Form 4797 you report the land on Page 1. part 1 subject to capital gains, and you put the building on part 3, Page 2 of Form 4797.
If you are using the ProSeries Asset worksheet you are recording the land and the building as two different sales. Then the capital gains from the land gets taxed at the lower capital gains rate.
If you have ProSeries professional you can do a practice problem with a residential asset purchased at the date of your situation. Use 0 for section1250 additional depreciation after 1975 and 100 % for applicable percentage. I think then looking at the Schedule D tax worksheet you will see how everything is conected.
Capital loss carryovers, if any reduce the section 1250 unrecaptured gain and are very helpful.
