First Sale of Rental Property

[Patrick Michael]

Preparing my first return with a sale of a residential rental unit and trying to understand how the gain is taxed.  The house was purchased in 2009 and has been depreciated, straight line, over 27.5 years. There is a a $106,877 gain and $31,772 in depreciation, none of which is considered "additional depreciation". This is were I'm getting confused. Some of what I have read says that the total amount of the gain that is the result of depreciation is taxed at 25%  and others said the entire gain is considered a LT capital gain (which I do not believe is true).  When I look at the Schedule D Tax Worksheet it looks like the gain from the depreciation is taxed at ordinary income rates with a maximum rate of 25%.  Is this correct?

Thanks

[Abby Normal]

32 minutes ago, Patrick Michael EA said:

ordinary income rates with a maximum rate of 25%.  Is this correct

Yes.

[BulldogTom]

Patrick,

If you are using ATX, the disposition worksheets in the Fixed Asset tab will do a great deal of the work for you.   It is clunky to work with when you go into the disposition tab, but it does a good job of getting everything where it needs to go on the tax return.  

Tom
Modesto, CA

[ILLMAS]

It’s also a good idea to have an excel spreadsheet to do the calculations, I use one that allocates the sales price (pro-rate) amongst building, lands, improvements etc...., then I tie it to the tax program.

[Abby Normal]

Yes, the land and building are separate dispositions. First you have to decide how much of the sales price was for the land. Then prorate the closing costs by the same percentage.

We use the most recent assessment to ballpark how much is land vs. building. We do the same when a building is purchased.

[BulldogTom]

The bulk sale disposition worksheet in AX will do the allocations for you....Just saying.

Tom
Modesto, CA

[ILLMAS]

8 minutes ago, BulldogTom said:

The bulk sale disposition worksheet in AX will do the allocations for you....Just saying.

Tom
Modesto, CA

I used to be a Proseries user and when I moved to ATX I kept on using it.

[Abby Normal]

2 hours ago, BulldogTom said:

The bulk sale disposition worksheet in AX will do the allocations for you....Just saying.

Tom
Modesto, CA

You can't bulk sale different kinds of property. Well, apparently you can but you really should not.

[Patrick Michael]

Thanks to all.  I learn so much from all of you.

[SaraEA]

As I understand it, and I could be very wrong, for real estate only the portion of depreciation in excess of SL is subject to recapture.  If the property has been depreciated under MACRS, there is no excess and hence no recapture.  The depreciation taken is subtracted from cost to yield the adjusted basis, so it raises the amount of capital gain, which is taxed at cap gain rates.  If over time the owner had added Sect 1245 property like appliances etc, those gains would be subject to recapture at the 25% rate.

[Pacun]

Without researching, it is my understanding that if there is a gain bigger that the depreciation allowed or allowable, the whole depreciation is taxed as ordinary income, which is consistent with the benefit received when the depreciation was allowed or allowable.

[DANRVAN]

On ‎01‎/‎19‎/‎2018 at 7:01 AM, Patrick Michael EA said:

  When I look at the Schedule D Tax Worksheet it looks like the gain from the depreciation is taxed at ordinary income rates with a maximum rate of 25%.  Is this correct?

Thanks

No.  Actually It is an unrecaptured section 1250 gain that is taxed at a maximum "capital gains" rate of 25%.