Sale of Farmground and price assigned to farmhouse less than accumulated depreciation - checking myself

[jasdlm]

Farm ground sold for $1,000,000.  Client inherited the farm 40 years ago and depreciated the Farmhouse for $19,000.  Obviously fully depreciated.  Appraisal for sale of property assigned $5,000 to Farmhouse.  Just confirming that I recapture $5,000 against the farmhouse and the remaining $14,000 on the 4797 against the land sale.  Looks weird with depreciation against land, but I think this is how I properly report it.  Do I have this completely mucked up?  Thanks much.

[Abby Normal]

Land was never depreciated, so all recapture goes with the building, which only had a 5,000 gain, less prorated selling expenses. This needs to be two separate assets.

[jasdlm]

1 minute ago, Abby Normal said:

Land was never depreciated, so all recapture goes with the building, which only had a 5,000 gain, less prorated selling expenses. This needs to be two separate assets.

Thanks much, Abby.  This is the way I initially recorded it, but then I went back and changed it.  This is a partnership, and the accountant for one of the partners is telling that partner that the full $19k has to be recaptured ... the software, of course, won't calculate this with only a $5,000 gain.  I've been practicing for 20 years, but when another professional takes a totally different approach than I do, it sends me spinning. Google then goes from being my best friend to my worst enemy as research generates answers all across the board.  The later in the season, the more I question myself.

So to confirm, $5,000 recap on this asset.  Depreciation recapture limited to the lesser of the gain or the depreciation previously taken (which has been my understanding in the past, but the other partner's practitioner has been practicing far longer than I have).

Thanks so very much for helping with this.  This shouldn't be this hard.

[Abby Normal]

It's all straight line depreciation so it might not make any difference in the tax, but if they want to show the full 19,000 then they have to allocate 19,000 of the sales price to the building. That's probably the best thing to do.

[Lee B]

The Sale Appraisal Value of $5,000 implies that the house is worthless and needs to be torn down.

If that's the case, why not appraise it at $ 0?

[TAXMAN]

I am incline to leave price at 5k if property was valued at 1m. I too would think that farm house is worthless. Was appraisal a certified one?

[jasdlm]

53 minutes ago, TAXMAN said:

I am incline to leave price at 5k if property was valued at 1m. I too would think that farm house is worthless. Was appraisal a certified one?

Yes.  Actually appraised for $15,000, but my client's share was $5,000  (and share of the depreciation was $19,000).  No 1065 has ever been filed; sold as 3 joint tenants.

[Lee B]

41 minutes ago, jasdlm said:

. . .  No 1065 has ever been filed; sold as 3 joint tenants. . . .

6 hours ago, jasdlm said:

. . .  This is a partnership, and the accountant for one of the partners is telling that partner that the full $19k has to be recaptured ... 

 

[jasdlm]

Sorry CBSLEE.  A partnership with no organizing or legal documents (that started before I was even in grade school).  Since time began, they have each been claiming 1/3rd of the income and 1/3rd of the expenses (including depreciation) as prepared/distributed on a sheet of paper by the accountant for one of the 'partners'.  I apologize for using the term loosely.  I actually see quite a few of these (what I would call partnerships but no formal legal entity and no 1065) with clients that come in from the agriculture sector.  They've all been doing things this way since the mid 70s.  What would you call it?  How should I refer to it?

I believe the IRS would consider this a partnership.  They should be filing a 1065 (and should have always been), but that ship has long sailed.

Curious what others do when they get a client (only one of the partners is a client) who has been filing this way on a farm or rental property for years.  Do you push the 1065 issue or refuse to take the client?  I have a small handful of peeps like this. 

[Lee B]

Some years ago, a new client, 3 brothers owned a rental, a restaurant building. The prior preparer, a CPA, had been filing as joint tenants.

So I did the same. Several years later they received a letter from the IRS telling they had to file a 1065.

It's a bit of a gray area. If it's investment property, then I am ok with the joint tenant approach.

Once there is active participation, then in my mind it's definitely a partnership.

How you approach it is your decision.

[DANRVAN]

18 hours ago, jasdlm said:

A partnership with no organizing or legal documents

 

18 hours ago, jasdlm said:

when they get a client (only one of the partners is a client) who has been filing this way on a farm or rental property for years.  Do you push the 1065 issue

Is the land actually owed by a separate legal entity; or is it  jointly owned by the individuals who share the income and expenses in proportion to their ownership?

If the land is jointly owned by the individuals, it is not considered a partnership unless the rental activity rises to the level of a trade or business.

 

[DANRVAN]

21 hours ago, jasdlm said:

sold as 3 joint tenants.

Just caught that part.  No 1065 needed.

[DANRVAN]

21 hours ago, jasdlm said:

  Actually appraised for $15,000, but my client's share was $5,000  (and share of the depreciation was $19,000).

Allocate the sale price of the house based on the appraisal.

[Lee B]

For an in depth discussion of this issue see The Tax Advisor:

https://www.thetaxadviser.com/newsletters/2020/mar/married-taxpayers-jointly-owned-business.html

In addition there are a number of significant legal issues which should be considered with respect to using a joint venture.

[TAXMAN]

I am still inclined to sell @5k recapture 5k. What would you recapture 19k against if the only thing left is land?

[DANRVAN]

43 minutes ago, cbslee said:

For an in depth discussion of this issue see The Tax Advisor:

While the focus of the article was on a business carried on by a married couple,  it made reference to  Regs. Sec. 301.7701-1(a)(2) which directly applies to the OP:

" Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for federal tax purposes."

[DANRVAN]

30 minutes ago, TAXMAN said:

I am still inclined to sell @5k recapture 5k. What would you recapture 19k against if the only thing left is land?

If sell price equals appraisal, then yes, report $5,000 towards house.   However, $19,000 still applies to the house, but recapture is limited to the gain, so excess does not matter.