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

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 ProConnect Tax calculate the unrecaptured gain? 

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

The input can be found by following these steps:

1. From the Input Return tab, go to Ordinary Income ⮕ Depreciation.
2. Go to the Disposition tab.
3. Locate the Sale of Asset (4797/6252) section.
4. Enter an option for 1=recapture excess over SL, 2=recapture all, 3=no recapture (or enter recapture amount) [Override].

This 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. 

How do I adjust the amount?

1. From the Input Return tab, go to Schedule K ⮕ Other Schedule K Items ⮕ Other Schedule K Items.
2. Enter a positive or negative adjustment in Unrecaptured Section 125o gain [Adjust].

You can allocate this adjustment in the Special Allocations tab.