Tax Question On Rental Property Sold

if you've actually looked up the code sections listed, you can eliminate most of them by title alone. so i'm wondering whether you actually have looked them up.

Section 1231 - Property used in the trade or business and involuntary conversions

Section 1242 - Losses on small business investment company stock

Section 1244 - Losses on small business stock

Section 1245 - Gain from dispositions of certain depreciable property

Section 1250 - Gains from dispositions of certain depreciable realty

Section 1252 - Gain from disposition of farm land

Section 1254 - Gain from disposition of interest in oil, gas, geothermal, or other mineral properties

Section 1255 - Gain from disposition of Section 126 property

You should be able to eliminate nearly all of these depending on your facts.

Let us know which one(s) is/are left.

Have you been able to locate the Code online? If not, I would start there after you have narrowed down the list and read the sections that remain. Should be pretty easy to get the list down to 1 to 3 or so possibilities.

Note: The following descriptions are very generalized and far from inclusive. Property used in certain businesses may fall under a different code section. If you're not sure, check the instructions for Form 4797 on the IRS Web site.

Section Description

1231 Nondepreciable real property (such as land); property disposed of through an involuntary conversion (such as a condemnation); depreciable real property not included in any other code section; certain livestock

1242/1244 Stock of certain small businesses and small business investment companies

1245 Depreciable personal property; certain single-purpose agricultural and horticultural structures; elevators and escalators placed in service before 1987

1250 Depreciable real property (not included in Section 1245) for which you claimed accelerated depreciation

1252 Farmland held less than 10 years for which you claimed a deduction for soil and water conservation or land clearing expenses

1254 Oil, gas, or geothermal property placed in service before 1987 or for which you claimed depletion or certain other deductions.

1255 Section 126 property

Do any of these look like they would be for a simple capital gains/losses on rental property? I went to the instructions on Form 4797 but there was no explanation

I may be wrong but I thought that for residential rentals the IRS gave you no choice but to depreciate them. Or at least they make you pay taxes on the amount that you should have depreciated the properties whether or not you actually deducted the depreciation in the first place. Were these two properties not for residential use?

You are right.

You are SOL if you didn't depreciate.

They make you recapture that depreciation.

An interesting tax deduction, they give then they take away.

Warning, as a tax preparer, I have heard plenty of nightmare stories about owning rental property, like the people who jackhammered a firepit into the living room.

Most real property (not the value assigned to land) used in a rental activity is section 1250 property.

And it is true that you have to recapture the depreciation whether you took it or not.

At the very minimum, I would depreciate the properties this year (2007) and reduce the basis (recapture the depreciation) by the depreciation taken this year. The effect is that you will have a more expenses on Sch E and a larger capital gain on Form 4797.

Also, make sure to assign as high as possible a value to the land....if there is any. Land is not depreciable so the more value you can assign to land, the less depreciation problem you have. Land....because it is not depreciable....should not require a code section. It is not sec 1250 property. Not sure how you have to do this in Tax Cut.

If you have a lot expertise and energy, you could amend 2005 and 2006 and depreciate the properties in those years. Then you could recapture those years as well.....lower your basis in 2007. Again, there would be very little net effect. Tax refunds for 2005 and 2006 and more tax owed in 2007 because of a larger capital gain.

Finally, if by some chance your adjusted gross income has been over $150,000 these past years, all your problems could be solved. I won't go into that. But, if your adjusted gross income has been over $150,000, let me know and I'll explain.

Good luck.....

p.s. you might want to consider hiring a professional. This type of issue is more than a bit complicated.

living in the pasture wrote:

Warning, as a tax preparer, I have heard plenty of nightmare stories about owning rental property, like the people who jackhammered a firepit into the living room.

On the other hand, I am earning about 15% on my rental properties compared to the stock market which is down 15% this year.

I did have a renter take out a shower and put a bathtub in without asking me. Of course that was actually an improvement. We have had a couple places torn up a little. The one guy liked to beat up on his wife as well as our walls. The worst thing a renter can do is bring in cockroaches and let them multiply. You pretty much have to hire an exterminator because the powerful chemicals are not sold retail. You also have to wait about a month to make sure they are all gone. New renters don't like to find dead cockroaches all over the place.

This is not the case in Canada (Capital Cost Allowance deduction in a taxation year is at the discretion of the Canadian taxpayer) and I'm shocked US tax law imposes this punative measure. In the year of disposition, a US taxpayer is required to recapture the depreciation the tax payer had the option to take on a depreciable asset, even if they didn't deduct the expense off your taxable income? OUCH!! Is there any relief available to a taxpayer in facing such a recapture?

I am going to have to go back to '05 & '06 and refile and depreciate those 2 properties (and my other rental property). Its a pain in the arse but I will at least get a small return for those years....My tax preparer charged me $450 to do my taxes and I was just trying to save money but now I'll happily pay her double to fix this mess.

I sold 2 properties this year and 2 last year in an attempt to simplify my life (and build a new home) but the market has changed so much that it's time to buy again. My bank will loan 70% on the tax accessor's appraised value of the home. There are plenty of homes being sold at the foreclosure auction on the court house steps that are far below that appraised value to where you can pick up these house with zero down. If you have good credit and some basic remodel skills now would be as good as time as ever to get into investment property.