Discussion:Capital Gains tax question

Also consider that a $ 300,000 gain (plus depreciation allowed/allowable) can wreak havoc on other taxable income, and bring into play itemized deductions/exemptions limitations and phase-outs. And who knows if the 15% rate will hold for the entire year.....and if a change will be retroactive.

A fact I still forget about, 12 years later; until I actually proforma the forms for an anticipated transaction.

But would the gain on the land be Section 1231 gain or capital gain?

if gain: tax according to capital gains rules

if loss: tax according to ordinary loss rules

where 'capital' refers to capital gains income

and where 'ordinary' refers to ordinary income

Later edit: although doing so wouldn't change the outcome as long as you allocated at least as much of the sales price to the building as the original basis before depreciation.

for example, you might use a ratio similar to the way the tax assessor valued the property this year.

e.g. the assessor might value this property at $585,000, of which $140,000 is the value of the land.

Thus, it might be reasonable to use the ratio/formula 140/585 x 700,000 to come up with the amount of the purchase price to allocate to land.

(I wouldn't create an ordinary loss by allocating zero to appliances with any basis remaining, though, unless there was an overall loss)

the appraisal might also have a great breakdown of the value land vs building vs appliances - wouldn't it be reasonable to use that formula?

D&T, unless the contract specifies otherwise, and unless the assets comprise a business, then the buyers and sellers allocations don't need to match.

I'm willing to bet that *none* of the gain on the sale of this building will be "1250 depreciation recapture". You see, nowadays there's this type of gain that is "unrecaptured section 1250 gain" that's taxed just like a Section 1231 gain, but is taxed at a "special" tax rate, the taxpayer's ordinary tax rates (although the gain isn't ordinary income) but never more than 25%.

If that doesn't make sense, you should read about it in the IRS Publications and prepare a few dozen Form 4797s. After a while, the incredibly complicated scheme that Congress has concocted will begin to reveal itself. Pretty much, Section 1250 recapture (ordinary income and subject to acceleration in an installment sale) doesn't exist any more. It's been superseded by something even *more* arcane, the beloved "unrecaptured section 1250 gain" of IRC Section 1(h)(1)(D), that's described in an earlier post to this thread. *Maybe* just following the instructions for Form 4797 will get the preparer who isn't interested in learning all about it to the right result on the tax return. And maybe it won't.

[And, parenthetically, even if the assets do "comprise a business" the buyer and seller are *not* required to use the same allocation of the purchase/selling price among the assets. What is required, however, is that they both complete and file Form 8594.]

I hear you but I'm not following you, JR1.

All of the assets, fall within the allocation class, Class VI for our purposes if I recall correctly, the assets with that Class, i. e. Class VI, are to have that portion of the purchase price assigned, or, all of the purchase price, allocated by the relative fair market values within that class.

This ratio of allocation may have changed since the allocation was made for the original purchase.

If, for example, the buildings today are unoccupied, unmaintained, vandalized, fire-gutted garden apartments and the first thing any purchaser would do is to raze them [okay, maybe he should evict the squatters, first], then they - the buildings - represent more of a liability than an asset, and the entire selling price should be - must be - ascribed to the land. And the "unrecaptured section 1250 gain" just disappeared.

I don't see any info from the OP about the current relative value of the land and buildings. What's more, I must politely insist that my "worthless building" scenario is no less plausible than any other *factual* scenario. Until you look, you won't see. That's why we accountants wear those green eye-shades, isn't it...? Drive by the property and see what's there! You don't even have to tell your client you peeked....

Happy Fourth!! God Bless America!!

Well that sure took a while! How about *me* returning the compliment by saying that your "it is what it is if you can support it" is a simply awesome piece of tax planning/after-planning insight. It deserves to be engraved on that thing - what's the word? - over the entrance to my office!!