How the unrecaptured section 1250 gain is calculated for 1065 Schedule K-1, box 9c in Lacerte

For more Schedule K-1 resources, check out our Tax topics page for Schedule K-1 where you'll find answers to the most commonly asked questions.

Unrecaptured section 1250 gains will be reported on Form 1065, Schedule K, line 9c, and passed through to each partner’s Schedule K-1 based on their ownership percentages unless specially allocated.

Why is this generating?

Unrecaptured section 1250 gains may appear on any partnership return that sold depreciable real estate.

When a depreciable asset is sold, the depreciation that has been allowed is subject to recapture. When depreciation is recaptured, a portion of the gain on the sale is taxed at ordinary income tax rates instead of the more favorable capital gain rates.

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. 

The portion of the gain attributable to this non-recaptured depreciation is labeled unrecaptured 1250 gain and is subjected to a higher capital gains rate.

How does Lacerte calculate the unrecaptured gain? 

Unrecaptured 1250 gain is calculated by subtracting Line 26g on Form 4797 from the smaller of line 22 or 24.  Lacerte calculates this automatically and carries it to Form 1065, Schedule K, line 9c. 

The input on Screen 14, Depreciation for the 1=recapture excess over SL, 2=recapture all, 3=no recapture (or enter recapture amount) [O] (code 67) field under the Sale of Asset (4797/6252) section won't impact real estate with Method 85 or any straight-line method as mentioned above, because the prior depreciation is treated as an unrecaptured gain since it was deducted from ordinary income initially. Press F1 on your keyboard in this field for more information.

How do I adjust the amount?

1. Go to Screen 22, Other Schedule K Items,
2. Enter a positive or negative adjustment in Unrecaptured Section 125o gain [A].

You can allocate this adjustment on Screen 29, Special Allocations.