Unrecaptured 1250 gain on K-1

[JeffCPA]

I will try to explain what is going on.   

K-1 form that my client received as a limited partner reports (I did not prepare the K-1 form; I am simply working off of that which another firm prepared for the LLC):

line 9c/unrecapture 1250 gain:  93,374.00

line 10: Net Section 1231 gain:  195,636.

Client has $87,353 of short term carryover loss from prior year, and $11,364 long term carryover loss. 

Form 4797/Part 1 sales or exchanges of property used in trade or business more than 1 year, has a gain figure of $199,629; flowing to it, and that says on form "From k-1."   I assume this is flowing from the 195,636 of 1231 gain (not sure why it bumps up to $199,629).

This gain, $199,629 flows to Schedule D, line 11 and becomes part of overall long term capital gain. 

The -11,364 of long term capital carryover loss, mentioned above, gets subtracted, so line 15, Schedule D is $188,353 (there are $256 of other capital gain distributions) included.  

So far so, good. 

Line 7 of Schedule D, shows the total net short term loss being -87,351.  Basically, all of the short term capital loss carryover, with some other short term loss. 

LIne 16 of Schedule D, which reconciles short term loss and long term loss, reports total long term gain of $101,002.  

Thus, nowhere on Schedule D, has the $93,374 of Section 1250 unrecaptured gain been accounted for. 

In addition, and this is critical, if I go to line 19 of Schedule D, there is a link to "Unrecpatured Section 1250 Gain Worksheet.  when I go to that worksheet, the Section 1250 unrecaptured gain from the K-1 form is there (although slightly higher number), and lines 15 and lines 16 of that worksheet are taking the long term carryover loss and the short term carryover loss mentioend above, and adding the together, and they are cancelling out the unrecaptured gain.  So, line 18, of the unrecpatured gain worksheet, says that the unrecpatured Section 1250 gain is zero. 

I don't understand this, and this does not seem right.   How can there bee unrecaptured 1250 gain of $95,000, and the long and short term capital loss get applied to that to cancel out that 1250 gain to zero. 

And at the same time, back on Schedule D, those long and short term carryover losses are applied in full, again to reduce the Section 1230 gain from 199k down to basically 100k.   Is the program working correctly here.  Seems like the carryover losses are being counted twice?    Please help.   what am i doing wrong. 

[sjrcpa]

Sounds like the program is correct. Unrecaptured 1250 gain can be taxed at a maximum rate of 25%; not will be taxed at 25%.

[JeffCPA]

Not sure I follow your response,.  I was not especially concerned about the tax rate for unrecaptured gain.   My confusion lies with the carry over losses from a prior year seeming to be used/deducted twice.   My fact pattern is a bit convoluted. 

[sjrcpa]

I'm too busy to work thru your numbers, but look at it another way.

Suppose client got that K-1 and had $300K of current year net capital losses. The unrecaptured 1250 gain has no tax effect because it is smaller than the losses.

I would manually work through all of the Sch D worksheets.

[JeffCPA]

I will go back through the worksheets, and no worries on being busy.   Certainly understand that.  No need to reply to this message, but in gross terms, 

the K-1 shows 93k of unrecaptured 1250k (roughly), and another 195k of Section 1231 gain.   Thus, there is total gain of 288k being shown on the K-1.    There is essentially no other gain on the return.  

There are 95k of carrry over losses.   Thus, the 1040 should be showing gain of 193k.  But Schedule D on Form 1040 is not showing that.  It is showing gain of only 100k.    The carryover losses are being used twice to offset the gain.   that is what is not making sense to me. 

[sjrcpa · Accepted solution]

The unrecaptured 1250 gain is included in the 1231 gain.

[JeffCPA]

I was going to add that to my last comment, as a possible explanation, but you have hit the nail on the head.  Thanks. 

[sjrcpa]

You're welcome.