Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
MLP Recapture of depreciation on Sale
Question on recapture of depreciation upon sale of an MLP. The MLP does provide a Sales Schedule showing your adjustment to basis as well as the amount of Ordinary Income resulting from recapture. However Section 1254 depreciation recapture is limited to the lesser of the amount of depreciation claimed or the profit upon sale defined as sale proceeds minus adjusted basis. If I have no gain on the sale (proceeds less than adjusted basis), do I need to report Ordinary income. Am I correct that an MLP in the business of extracting oil and gas like the ill-fated LINN Energy (as opposed to MLPs that collect, process, and transport the product) is considered to be section 1254 property? Are those other MLPs considered as section 1245 properties? Section 1245 recapture appears to be limited similar to Section 1254.
Re: MLP Recapture of depreciation on Sale
When you sell a partnership interest, you're considered to have sold your share in each of the partnership's assets. Some of the assets may have ordinary income recapture (1254 is IDC recapture, not depreciation recapture - if you're interested, see the Form 4797 instructions). You're required to report the recapture gain as ordinary gain even if you sell the partnership interest at a loss.
Example: You purchased a partnership interest for $200 and sold it for $150, a $50 loss. The partnership informs you that your share of recapture income is $30. You report $30 of ordinary income on Form 4797 and you report an $80 capital loss on Schedule D. Note that your total loss remains $50.