Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Sec 121 and unrecaptured Sec 1250 gains
Posted by: BruceM, May 13, 2017 04:53PM
Hello


In 2010 wife and I buy house as personal residence, paying $500,000. In 2014 we move and rent house, taking $20,000 S/L (27.5 year) depreciation over the next 2 years, selling the house in late 2016 for adjusted selling price of $800,000. We are in the Fed 25% tax bracket.

The gain on sale is:

Adjusted basis = 500,000 - 20,000 = 480,000

Gross gain: 800,000 - 480,000 = $320,000. Because this is less than the max $500,000 Sec 121 exclusion, it would at first seem we do not have to report any of the gain. But in reading the examples in Pub 523, it seems that the $20,000 of unrecaptured gain cannot be excluded, but must be reported as income for 2016. Correct?

The tax rate on this $20,000 seems different than what is reported in the popular press. Running some trial-and-error simulated tax returns in TurboTax seems to be saying that unrecaptured 1250 is taxed as ordinary income, up to a max 25% rate for marginal rates above 25%. Is this correct?

Thanks

BruceM

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Snargle, May 14, 2017 01:42AM
I'm with you up to where you say that unrecaptured section 1250 gain is taxed as ordinary income. What I've read is that it's taxed as capital gain, but using a rate that's capped at 25% rather than the normal capital gain maximum rate of 20% (or 15%, depending on what year we're dealing with).

Does that confirm the TurboTax trial-and-error results, and vice versa?

What have you read "in the popular press"? A lot of writers on this topic have a really hard time describing the taxation of this income. Include me in that group...

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: BruceM, May 14, 2017 03:02PM
Yes. If I put in only unrecaptured Sec 1250 as the AGI, here are the tax numbers TurboTax gives for a retired couple >65 who are married filing jointly:

AGI ....................... Tax ($)

30,000 .................... 683
50,000 .................... 3,096
80,000 .................... 6,096
200,000 ................... 35,744

These tax amounts are the same as ordinary income up to the top of the 25% bracket, and then the tax rate goes flat at 25%.

If I input a capital loss carry-forward, it reduces the AGI dollar for dollar. So the unrecaptured Sec. 1250 is treated as a capital gain on Schedule D and netted out with any capital losses and then when entered on the 1040 is treated as ordinary income up through the 25% bracket....it would seem.

I have never seen it explained this way at any web site, including the IRS or AICPA, which makes me think I may be missing something.

Comments?

BruceM

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Snargle, May 14, 2017 07:56PM
Is the unrecaptured section 1250 gain getting any benefit of the "special" tax rate brackets for long-term capital gain? I think they would be zero percent, 15%, 20% and maybe 25%.

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: BruceM, May 15, 2017 10:34PM
No. And this is what makes 1250 unique.

In the tax return in TT I created, if I make the only income unrecaptured Sec. 1250, it calculates the tax as ordinary income. But if I then insert a capital loss carryforward, it reduces the Sec. 1250-only AGI, dollar for dollar, and then taxes what is remaining as ordinary income. So to me this means that unrecaptured Sec. 1250 is part long term capital gain and part ordinary income up to the 28% bracket and above when it becomes a 25% flat tax

BruceM

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Cape retiree, May 16, 2017 03:27AM
This article I found seems to be related to your topic. [www.investopedia.com]

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Snargle, May 16, 2017 05:02PM
If you were confused before you read the investupidia article, I'm pretty sure you'll be even more confused afterwards.

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: triad, May 16, 2017 05:38PM
Shaking head.

1. You deducted $20K of depreciation while you rented the house. This was mandatory and you got a tax break. The amount depended on tax rates you were paying. (A few people got a suspended loss that they finally get to claim in the year of sale.)

2. The property didn't actually depreciate. It went up in value. Consequently the $20K you were allowed to deduct is added back to your income. This is the 1250 amount. If the IRS didn't add it back, you'd be double dipping.

3. The only thing special about it is that it gets a maximum tax rate of 25%. For many people, this is meaningless as they aren't in a higher tax bracket.

The good news, you are estimating the tax impact by running software. This can help detect situations were AMT kicks in. The bad news is you are not using YOUR tax situation, but randomly plugging in numbers.

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Snargle, May 16, 2017 06:46PM
"We are in the Fed 25% tax bracket," says BruceM in his first post. But I thought it would be their taxable income that's in brackets, not the taxpayers themselves...

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Art, May 16, 2017 08:10PM
triad

A small quibble: It is not mandatory that you depreciate the house. What is mandatory is that when you dispose of the house, you still must recapture the 1250 gain amount as if you had taken the depreciation expense. So it would be unwise not to depreciate it.

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Snargle, May 16, 2017 11:28PM
An even smaller quibble: If the owner claimed less than the depreciation that he would have been allowed (or claimed none), and can support that convincingly, he'll be expected to pay tax on the gain that's caused by the depreciation that he *didn't* claim, but the gain won't be taxed as unrecaptured section 1250 gain. See the definition of "section 1250 unrecaptured gain" in the Internal Revenue Code, Section 1, and that section's reference to Code Section 1250(b)(1), and especially the last sentence in Code Section 1250(b)(3), for determining the amount of gain that will be taxed as unrecaptured section 1250 gain.


What's the benefit of this? Maybe the gain will be taxed at capital gain rates rather than ordinary income rates. But the taxpayer didn't get the depreciation he didn't take!! Oops.

Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: triad, May 17, 2017 04:45PM
The form 3115 can be used to claim the overlooked depreciation in any year up to an including the year of sale. Other than the cost of paying for a professional to fill out the form and do the math, this will completely offset the 1250 depreciation.

If I was king, claiming depreciation would be optional, and if not claimed, not subject to allowed or allowable. For real estate, it's just a big PITA.


Re: Sec 121 and unrecaptured Sec 1250 gains
Posted by: Les Grans, May 17, 2017 05:23PM
It's life, triad, that is a big PITA. "Allowed or allowable" is just a special case of life.



Sorry, only registered users may post in this forum.