Cost of Sale

[Terry D EA]

I am too tired to look this up. A client sold a commercial building where he owned and operated a business that closed two years ago. A personal friend loaned the business some money (10K) to keep the business running. He only repaid a small portion and then the business closed. He did repay the balance of the loan from the proceeds from the sale of the building. Would the amount of the loan balance paid be part of the expense of the sale? Thanks to all in advance

Terry D.

[Bart]

I am too tired to look this up. A client sold a commercial building where he owned and operated a business that closed two years ago. A personal friend loaned the business some money (10K) to keep the business running. He only repaid a small portion and then the business closed. He did repay the balance of the loan from the proceeds from the sale of the building. Would the amount of the loan balance paid be part of the expense of the sale? Thanks to all in advance

Terry D.

Loan repayment is not deductible.

[kcjenkins]

NO, the repayment of PRINCIPLE is not deductible, just as the loan was not TAXABLE INCOME. But any INTEREST that he paid on the loan would be deductible.

Think of it this way. Say he borrowed the money to buy equipment or pay bills for inventory, payroll, or such. He deducted those expenses he paid, so he's already deducted that cost. To allow him to now deduct the loan again would be double dipping. But hey, this is the perfect year for him to report a capital gain, since the tax rate on cap gains is ZERO this year.

[Terry D EA]

Okay KC you got my attention. I really didn't think the loan repayment was part of the expense of the sale but thought I would get others opinionl. Now, if the cap gains tax rate is zero, why does the program still show a fair amount of tax due. This should be reported on form 4797 1245 property long term with depreciation recapture correct? When I look at the cap gains worksheet the amount is being taxed at 15%. Am I doing something wrong? Here are the figures: sales price 67090.00 basis 12,500, land value at the time of purchase was 1045 and there was 469.72 that are an expense of the sale. Full depreciation had been taken. I show 54,049 cap gain on line 13 and 11,455 depreciation recapture from form 4794 on line 14 of the 1040. Because of this and a 1099-C that is taxable, the client owes 6323. Thanks for taking a look at this.

Terry D.

[Terry D EA]

As I looked into this further, my client owned the property that the business rented from him and the depreciation was taken on his individual income tax return from Sch E. So, this makes this a schedule D transaction all the way correct? If I am right, then the 1245 depreciation recapture doesn't apply. I am tired and am having a difficult time trying to keep this straight. I am closing the office and heading home for some sleep. Maybe tomorrow it'll click.

Thanks,

Terry D.

[Terry D EA]

Wanted to move this up the list a little. Could someone please confirm whether this sale is reported on Sch D or form 4797 as section 1245 property.

Thanks,

Terry D.

[Maura]

The selling price and expenses should be allocated between the building (1250 property) and the land (sec 1231). The amount of depreciation recapture on 1250 property is taxed up to 25%. The 1231 long term gains would qualify for the lower capital gains rate. Where is the 1245 property coming from? The 0% capital gains is dependent on total taxable income and filing status.

[Terry D EA]

Thanks for your reply. I thought this maybe 1245 property as it is real property. After some additional investigation, I agree with the 1250 property and already had the land allocated as section 1231.

Terry D.