INSTALLMENT SALE

[TAXMAN]

TP has a rental acquired in 2005. Took regular dep (27.5years). TP sold on installment sale with a gain higher than original cost. Gain would consist of gain due to dep and gain above cost. I think gain due to dep would be 1250 gain and thus taxed at the max 25%. Question is as payments are received is the 1250 gain recaptured first and then the remainder gain as plain capital gain? I tried getting through the pubs for sales and can't seem to grasp which is first. Manny thanks to insight in this picture.

[jklcpa]

Ordinary income from depreciation recapture is recognized in its entirety in the year of sale. It is reported on the 4797 and in part I of the 6252. Only the portion of the gain that exceeds recapture income is reported as installment gain.  Pub 537 on installment sales might be helpful.

Link to Pub 537:

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 in Publication 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.