Discussion:Depreciation recapture on 15 year commercial building (ACRS, 3-1-84)
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Discussion Forum Index --> Tax Questions --> Depreciation recapture on 15 year commercial building (ACRS, 3-1-84)
| 24 July 2006 | |
| A commercial building was placed in service on 3-1-84. It was depreciated over 15 years using the straight line method.
After the building is sold in August 2006, how is depreciation recapture calculated? I know that the cumulative excess-over-straight-line rule does not apply to ACRS commercial property of 18 or 19 year life and that the recapture will occur on all depreciation taken. | |
Death&Taxes (talk|edits) said: | 24 July 2006 |
| Because Straight Line was elected those many years ago, you avoid having to treat the property as 1245 property. This was an old trap that professionals were aware of back then in those heady days of ACRS. NCPE's workbook for 2004 states "This potential Section 1250 gain recapture will no longer apply for years after 2004 as all ACRS property will be fully depreciated." The book then went on to highlight what I mentioned above. | |
| 24 July 2006 | |
| Odd that the excess over stright line section of Form 4797 continues to exist. Zero basis in building. (excess recapture ended in 2000 -- 2004 was just the last year it could possibly exist for anyone because '84 was the last year for 19 year property.) All 1231 gain. | |
| 22 March 2007 | |
| The trap referred to above by Death&Taxes hasn't expired, has it?
I have a client that sold commercial ACRS property in 2006. The property was placed in service July 1, 1985 and seems to have been depreciated using the 19 year ACRS table. Even though the property would have been fully depreciated in year 20 (2004) using the straight line method, it appears all depreciation must be recaptured as ordinary income because it was commercial real estate and a straight line election was not made. Am I correct here? | |
Death&Taxes (talk|edits) said: | 22 March 2007 |
| I believe you are correct, and if this were September would go looking in code etc. That workbook shows a commercial warehouse bought 3/86 on which 19 year ACRS was used. Cost without land 500K, with non-striaght line used. The 4797 example shows the 500K depreciation taken and included as 1245 property on lines 25a and 25b of the 2003 4797. Well, look at it this way: With a large cap gain, they will probably get zonked by AMT anyway. | |
| 22 March 2007 | |
| Thanks for your time D&T.
You too WillyB, though I'm not sure exactly what you're saying with that citation. If I have recapture, I don't have unrecaptured. I've got $75 of 19 year ACRS depreciation taken and $425 gain on the sale. The sales price was also $425 for this fully depreciated non-residential building. | |
| 22 March 2007 | |
| The building is §1250 property which makes the $75K §1250 depreciation. That amount will be taxed at 25%. | |
Death&Taxes (talk|edits) said: | 22 March 2007 |
| Commercial property placed in service after 1980 and before 1987 is treated under Section 1245 rules unless the statutory straight line depreciation was used. Way back then whenever we had vacation type property with short term rentals we straight-lined it for fear of running into this. | |
| 22 March 2007 | |
| Ah yes 1/1/81 to 1/31/86, but you get a negative AMT adjustment, no? | |
| 23 March 2007 | |
| I don't think so, Dennis, re the AMT adjustment. The property is fully depreciated for AMT too. Since accumulated regular and AMT depreciation are the same there is no AMT adjustment.
I prefer your answer to D&Ts. Just wish I had some statutory authority to get me there. The way I'm reading the statutory construction, current §1245(a)(3) is inapplicable to classifying this asset because it only applies to assets placed in service after 12/31/86 in tax years ending after that date. Thus ACRS assets continue to be classified as 1245 or 1250 utilizing the rules of pre MACRS §1245. Specifically §1245(a)(5), the relevant portion of which is summarized 2 posts up by D&T. | |
| 23 March 2007 | |
| Negative AMT adjustment was the wrong way to put it. What I meant is that for AMT purpose it is a 1231 gain because the AMT deduction was straight line. (I actually ran into this years ago with a charitable contribution of appreciated property where for regular tax purpose the deduction was reduced by ordinary income recapture but recognized in full for AMT). Meaningless because the instant case used straight line as did virtually everyone else. | |
Death&Taxes (talk|edits) said: | 23 March 2007 |
| Now I see what you were saying. I've kept the 1245 argument in my head 20 years or more but forgot about AMT. That was before the new and improved AMT of 1986. | |
| 23 March 2007 | |
| you lost me.
my gut reaction seems to be saying i should rejoice since I've no AMT to pay. but then again, I shouldn't have AMT since the recapture is coming in at a higher rate. did i miss something clue me in, si'l vous plait. | |
Death&Taxes (talk|edits) said: | 23 March 2007 |
| I think both Dennis and I thought there would be AMT since it usually latches onto gains like ticks on a dog. | |
Thetaxisright (talk|edits) said: | 26 November 2007 |
| Just casually saw this discussion and I was wondering if you tell me where it is written that commercial buildings depreciated under Acrs is cconsidered Section 1245 property. I am fairly new to the business and trying to absorve as much knowledge as possible.
Thanks | |
| 27 November 2007 | |
| If you have some old code books, look at Internal Revenue Code § 1245(a)(5). This paragraph was repealed for property placed in service after 12/31/86 in years ended after 12/31/86. | |
Death&Taxes (talk|edits) said: | 27 November 2007 |
| 'Old Code Books' I spent almost an hour looking in RIA Checkpoint and other sources and could not find it, yet knew it was true. Thank you, Riley. | |
Taxstudent (talk|edits) said: | 27 November 2007 |
| D&T,
(Assuming your Checkpoint is set up in the standard way), pull up Code section 1245 in Checkpoint. Click on the "History" button at the top of the screen. Click on the link that appears in the Left Hand frame. This should open a pop up window that includes the changes in 1984 through 1986 that are relevant to this discussion. Every version of Checkpoint that includes the Public Domain Library should have this feature as far as I know. Thetaxisright, This reminds me of the time I had to explain to a client's CPA why a building placed in service in 1983 was depreciated over 30 years, i.e. not under ACRS. Transitional rules are found in the Statutes at Large and not in the Code. | |
Death&Taxes (talk|edits) said: | 27 November 2007 |
| Thanks so much, my friend.....it works. 10 years I've had this service and never knew that. | |
| 28 November 2007 | |
| Also, you can do a keyword search on 1245(a)(5), Checkpoint will take you to the RIA analysis of this old law. | |
| 28 November 2007 | |
| help me here. so even though the property is 100% depreciated you still have to recapture @ ordinary income if bought in 1984 if used ACR. If 100% depreciated then the straight line and ACR would both be 0 so where is the difference.
Also what workbook are you refering to? Neil | |
Death&Taxes (talk|edits) said: | 28 November 2007 |
| The workbok I referred to was part of a seminar given by National Center for Professional Education [Wayne, Jerry and the boys are commonly referred to as 'the Cajuns'].
Way back during the reign of ACRS, if we chose to depreciate a commercial property using the accelerated percentages allowed, this converted the building to Section 1245 property forever and the depreciation would be recaptured as ordinary income, not at the 25% rate of today. If we elected to use the ACRS life but employ Straight Line over that life, the property remained 1250. Back then we were sure IRS would be on the lookout to catch people falling into this trap. My boss at that time felt ACRS was too rich for the blood for many people....especially the original version where real estate had a 15-year life. | |
Thetaxisright (talk|edits) said: | 3 December 2007 |
| Thanks a lot for the info. It shows the value of discussions like this and I will be contributing from time to time | |
Thetaxisright (talk|edits) said: | 17 December 2007 |
| Taxstudent
How can I subscribe to this RIA Service? | |
Taxstudent (talk|edits) said: | 17 December 2007 |
| The Public Domain Library is one of their base libraries that is included in most subscriptions. It was around $1000 last time I used it. CCH and others have similar offerings. | |
Death&Taxes (talk|edits) said: | 15 January 2008 |
| By the way, at the 1040 Update seminar in Atlantic City last Monday, Wayne Hebert noted the 1245 trap again in his part about Form 4797. From some of the reactions and questions, I had to presume this discussion had never been seen.
This can come up also if you have a ACRS depreciated vacation rental property where rentals were 7 days or less, in other words more of a commerical property. | |
