Rental property sale: where to report on form 4797?

[puravidapto]

Given the following data:
Purchase date: 01/01/2001
Building: 800k
Land: 200k
Sale date: 07/01/2022
Building price: 1,200k
Land price: 300k
Depreciation taken: 600k

I figured that:
- The capital gain is 500k
- The section 1250 gain (depreciation recapture) is 600k

How do I report the gain? Specifically, do I report:

- capital gain of 100k for the land in part I of form 4797
- capital gain of 400k for the building in part III of form 4797
- section 1250 gain of 600k for the building depreciation in part III of form 4797?

The Proconnect software does it report the capital gain for the land in part I, it reports in part III, and I have to force it, and that is why I need to make sure it is correct. 

[TaxGuyBill]

---

@puravidapto wrote:

Purchase date: 01/01/2013
Building: 800k
Depreciation taken: 600k

---

Can we back up a bit?  How was a building 3/4 depreciated in less than 10 years?  Unless there are unusual circumstances, something seems wrong.

---

@puravidapto wrote:

- capital gain of 100k for the land in part I of form 4797
- capital gain of 400k for the building in part III of form 4797
- section 1250 gain for the building depreciation in part III of form 4797?

---

Yes.

No, the "total gain" from the building on line 24 is $1,000,000.  However, the depreciation seems questionable, so that needs to be figured out first.

For the 1250 gain ... we need to clarify how they claimed $600,000 of depreciation in only 10 years.

[puravidapto]

Thanks for your reply! This is just an example, the actual depreciation is not part of the question, but to make the depreciation number work, I changed the purchase date to 2001.

[TaxGuyBill]

But depreciation *IS* part of your question.  Your third question asked about entering 1250 gain on the 4797.

If only straight-line depreciation was used, line 26 of Form 4797 is only zeros.  So other than reporting the sale on lines 20-24, nothing is entered about "1250 gain" on the 4797.

If accelerated depreciation was used, that changes that answer because the "additional depreciation" (depreciation in excess of straight line) is on line 26.

[puravidapto]

Thanks TaxGuyBill!

I agree that I do not enter anything other than 20-24 on form 4797, it is a straight line depreciation, but 600k is sec. 1250 gain, right? Specifically, I would enter (or the final result) would be:

Line 20: 1,200,000 (Gross sale price)
Line 21: 800,000 (Cost basis plus expenses of sale which is zero in this example)
Line 22: 600,000 (Depreciation)
Line 23: 200,000 (Adjusted basis)
Line 24: 1,000,000 (Total gain)

Of the 1,000,000 total gain, 400,000 is the capital gain, and 600,000 is the sec 1250 gain. Correct? The gain on the land 100,000 is capital gain as well, so the total capital gain is 500,000.

In this case, separating land from building does not make a difference, actually, when you sell a home, no one but yourself separates the price between land and building when reporting taxes. If I do not separate, I would have:

Line 20: 1,500,000 (Gross sale price)
Line 21: 1,000,000 (Cost basis plus expenses of sale which is zero in this example)
Line 22: 600,000 (Depreciation)
Line 23: 400,000 (Adjusted basis)
Line 24: 1,100,000 (Total gain)

Of the 1,100,000 total gain, 500,000 is the capital gain, 600,000 is the sec. 1250 gain, it is the same result, but how wrong is it?

[TaxGuyBill · Accepted solution]

---

@puravidapto wrote:

Of the 1,000,000 total gain, 400,000 is the capital gain, and 600,000 is the sec 1250 gain. Correct? The gain on the land 100,000 is capital gain as well, so the total capital gain is 500,000.

In this case, separating land from building does not make a difference, actually, when you sell a home, ... Of the 1,100,000 total gain, 500,000 is the capital gain, 600,000 is the sec. 1250 gain, it is the same result, but how wrong is it?

---

Yes.

Yes, it is the same result in this case.  However, (a) the Instructions for Form 4797 tell you to report it separately, and (b) in some cases can affect the 1231 gain/loss calculations and carryovers (if I remember correctly, that is primarily when the value decreases, but maybe there are other circumstances that I'm not thinking of).

[George4Tacks]

If you have all of these items in the depreciation already, then use this link to do a bulk sale - https://proconnect.intuit.com/support/en-us/help-article/federal-taxes/enter-bulk-sale-assets-procon...

The software should give you the correct result. 

[puravidapto]

It appears that the bulk sales combines the total proceeds, and total cost basis.

However, due to that the land can only have sec. 1230 gain and the building can have un-recaptured sec. 1250 gain, the sale price distribution between the land and building matters, even though the total sale price is the same. 

For example, in the original problem, we have established that we have the 1,100,000 total gain, of which 500,000 is the capital gain, 600,000 is the un-recaptured sec. 1250 gain.

However, given the total price 1,500,000 remains the same, but the building price is 200,000, and the land price is 1,300,000, then we will have 1,100,000 capital gain only attributed to the land, while the building has neither gain nor loss.

So my questions are:

1 - Bulk sale and selling separately can produce different results, even for the same type of properties such as 2 buildings, is bulk sale an IRS approved method?
2 - Can you combine different type of property such as depreciable building and non-depreciable land?

[puravidapto]

The other question I have is that if we can combine building and land in a bulk sale, then why does the IRS tell us to separate them? The IRS pub https://www.irs.gov/pub/irs-pdf/i4797.pdf says:

Depreciable Property and Other Property Disposed of in the Same Transaction

If you disposed of both depreciable property and other property (for example, a building and land) in the same transaction and realized a gain, you must allocate the amount realized between the two types of property based on their respective fair market values (FMVs) to figure the part of the gain to be recaptured as ordinary income because of depreciation. The disposition of each type of property is reported separately in the appropriate part of Form 4797. For example, for property held more than 1 year, report the sale of a building in Part III and the land in Part I.

[TaxGuyBill]

If Lacerte is not set up correctly to report it as two items on the 4797, then just enter things as two separate items in Lacerte.  Land as one asset, and Building (with no land) as a second asset.  Then sell them.

[George4Tacks]

@TaxGuyBill Do you report as two items? Land and building separately? How do you decide the allocation, since all we typically have is a property tax bill that is not very accurate. 

I don't think I have ever separated and I have never seen a nasty gram from IRS. I have only been doing this 50 years, so this may be a new trick this old dog needs to learn. 

[TaxGuyBill]

Yes, but if you have the original land value entered, ProSeries pretty much makes you do it unless you specifically tell it not to.

As for the allocation, I'll use the Property Tax statements and use that ratio.  I know a lot of people claim those amounts are way off, but in my area, they seem to be reasonably close.  At least in my area, the property tax valuations are done by certified appraisers (who work for the city/county), so they should be accurate.  The only difference is that sometimes they don't have access to the interior of the building, so they need to make some educated guesses.

But as I mentioned before, the only time I can think of when it matters is if the building decreases in value (combining them will alter the 1250 gain vs 1231 gain).  There could be other things too, but that is the only scenario that comes to my mind.

[puravidapto]

---

@George4Tacks wrote:

"Do you report as two items? Land and building separately? How do you decide the allocation, since all we typically have is a property tax bill that is not very accurate. 

I don't think I have ever separated and I have never seen a nasty gram from IRS. I have only been doing this 50 years, so this may be a new trick this old dog needs to learn."

1 - This is not a new thing. We always separate land and building as only the building not the land is depreciable.
2 - I decide the allocation by prorating the values based on, in order of preferences:
2a - county record which has separate values on the land and building
2b - private company's assessment
2c - Insured value for the building
2d - 80:20 ratio for the building and land

---

[puravidapto]

---

@TaxGuyBill wrote:

"But as I mentioned before, the only time I can think of when it matters is if the building decreases in value (combining them will alter the 1250 gain vs 1231 gain)."

I agree, please see the example in a previous post:

"However, given the total price 1,500,000 remains the same, but the building price is 200,000, and the land price is 1,300,000, then we will have 1,100,000 capital gain only attributed to the land, while the building has neither gain nor loss."

---

[corinnerichard]

i am new at this one, client sold a rental property last year bought in 2009 i have listed it on schedule e all these years, can you tell me how to proceed with the forms to use to report this thank you very much cr

[qbteachmt]

@corinnerichard 

You asked the same question as your own topic, last year, and get replies, follow this link:

https://accountants.intuit.com/community/proseries-tax-discussions/discussion/sale-of-residential-re...

This year, you are posting updates in other people's old topics from prior tax years. If you have  new question for the new tax year, you should start it as your own topic.