Unrecaptured Section 1250 gains are carrying to schedule K on the partnership return when there should not be any?

[TaxGuyBill]

So you did NOT report the sale of any real estate?

[IFB]

Yes, I did report a sale on Part III of form 4797 on the partnership return.  I entered -0- on line 26g because there should be no recapture of depreciation, but the program still puts the whole amount of the capital gain on the Schedule K, and then on the K-1's under both unrecaptured 1250 gain and section 1231 capital gain.

[TaxGuyBill · Accepted solution]

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@IFB wrote:

I entered -0- on line 26g because there should be no recapture of depreciation, but the program still puts the whole amount of the capital gain on the Schedule K, and then on the K-1's under both unrecaptured 1250 gain and section 1231 capital gain.

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Line 26g is for "recapture" (depreciation in excess of straight-line).  That is completely different than "Unrecaptured Section 1250 Gain" (gain due to the basis reduction using straight-line depreciation).

So if you had straight-line depreciation and if you had a gain on 1250 property, you SHOULD have Unrecaptured Section 1250 Gain on the K-1.

[IFB]

Thanks--I think I got lost in software instructions!

[IFB]

For depreciable real estate, this recapture is called section 1250 recapture. Unlike other asset types, only the portion of depreciation in excess of straight-line depreciation is subject to recapture. Since straight-line is the method of depreciation currently used for real estate, there’s usually no recapture of depreciation when depreciable real estate is sold. 

That paragraph above is from Intuit's explanation--Straight - line was the method used for this real estate, so there shouldn't be any recapture?

[IFB]

So... the UNrecaptured depreciation is the amount of the gain on the sale that is taxed at a higher rate because SL depreciation was used?

Not "Recapture" because only SL was used--difference in the terminology?

[TaxGuyBill]

Correct.

"Recapture" (based on depreciation in excess of straight-line) is taxed as ordinary income.

"Unrecaptured Section 1250 Gain" (based on straight-line depreciation) is a capital gain, but it is taxed at your ordinary rate, up to 25%.

And that is just for real estate (1250 property).  For other assets ("personal property", 1245 property), all of the gain due to depreciation is "recaptured" (even straight-line depreciation).