I’m sure you’re correct about line 4a of Form 4952. I had referred to line 4g but should have said that at least $25,000. in capital gain would be first entered in line 4d (Net gain from the disposition of property held for investment). In turn that would lead to the same entry amount in line 4g if the house owner elects to treat the capital gain as investment income.
The line 4g instructions are: “In general, qualified dividends and net capital gain from the disposition of property held for investment are excluded from investment income. But you can elect to include part or all of these amounts in investment income.
“The qualified dividends and net capital gain that you elect to include in investment income on line 4g aren’t eligible to be taxed at the qualified dividends or capital gains tax rates.”
I would like to use your comments to try to make correct calculations and I will include some numbers and dates to help calculate the pro rata treatment of the capital gain.
As you noted, “If basis is 125K less depreciation; then gain is 275K + depreciation.” Thus the house basis would be the purchase cost of $125,000. – $17,400. depreciation = $107,600. Then the gain is $275,000. + $17,400. depreciation = $292,400.
The house was the owner’s primary residence for 2-1/2 years from July 2006 to January 2009 (when it became rental property) and it will be again for 2 years from January 2020 to February 2022 when it will be sold, a total of 4-1/2 years of primary residence and 11 years of nonqualifying use.
As you also noted, “If exclusion is 250K – proration adjust, then taxable gain is 25K + proration adjust + depreciation.” The exclusion is reduced to $250,000. – 11/15.5 x $250,000. (proration adjust) = $72,581. Boo-hoo! Then the taxable gain is $25,000. + $177,419. + $17,400. depreciation+ = $219,819. Double boo-hoo!
Of the $219,819. taxable gain, the depreciation recapture will result in $17,400. being taxed separately at a maximum rate of 25%. The regular capital gains tax rate would apply to the remaining $202,419. or it could be entered on lines 4d and 4g of Form 4952 with an election to take it as investment income that would be fully offset by a larger amount of investment interest expense the house owner accrued in prior years.
Thank you for your help and any further comments about the foregoing would be much appreciated.