Discussion:Question on Schedule D from beginner

Just had a question on a schedule D.

I have a client who sold a house(personal) for 192k and cost basis was 150k. Is the amount from schedule D that is reported as capital gains on line 13 of form1040 = 42k? (thats what I have, but it looks like a rather large amount to be reported as a capital gain, meaning the whole gain being taxable as income)

What is the 28% gain(loss) for?

I've read up on this but am still a little confused, sorry a bit new at this and would greatly appreciate any help or guidance (I meet with my boss once a week, so didnt get a chance to ask him yet).

Thank you

Have you read any IRS Pubs?

we've got to know how 'new' you are vs how close you are to being a CPA

Thanks for the reply.

you seem to be changing your story

personal house

now rental

if rental, read IRC §1250

Lord help your client if your boss won't.

But that's not the end of the story. In each of the years in which he rented the property, he took a deduction for depreciation and thereby reduced his taxes. In fact, the property did not depreciate - it appreciated. Because he took a deduction on a ficticious event (not only allowed, but used to be mandatory), he now has to recapture that depreciation in the year of sale.

For example, say the depreciation totalled $10,000 over the years, he would pay tax on the difference between the sale price and the basis at a maximum capital gains rate of 15%. $42k x 15% = $6.3 k (plus state tax). He would also pay capital gains tax on the depreciation recapture at 25%. $10k x 28% = $2.800 (plus state tax).

Wouldn't it be nice if the story ended here...but it doesn't. The full amount of the gain is added to his other income for determining his marginal tax bracket. It frequently happens that someone pays a higher tax rate as a result.

Oh, and one more small item. AMT. Capital gains can push someone into AMT income level so that taxes can go up even more.

So, what seems like a simple situation has several levels to it and can require an extensive amount of time to determine the best course of action for the client. It's nice when the client comes to you prospectively, but most often the client comes to you after the fact and then is incredulous that you can't make things better.

To answer your other question, 28% rate is on the sale of collectibles (such as artwork) & qualified small business stock.

allowed, but used to be mandatory,

I thought taking depreciation on rental property WAS required....have I missed a change in the law?

Thanks

Sec. 1016 Basically, you are not allowed to forego depreciation in order to use it in a later year when it may be more advantageous. In the case of depreciation allowed or allowable (under straight line), if you did not receive a tax benefit, such as in an unallowable passive loss, then you do not have to reduce basis by the depreciation. It's up to the TP to document the lack of tax benefit.

There's a chance that there hasn't been any tax benefit due to suspended losses; I'm not that familiar with their tax situation. However, the theory he's putting forth IS wrong.

I used to have a sign hanging in my Philadelphia office that would fit this guy: If A--holes could fly, this place would be an airport.

I do remember, JR1, those days with OIH that you had to make sure the business use stopped well before any sale was contemplated.