Originally Posted by Speedymdl
I sold a rental house on land contract several years ago and last year (and probably the years after I sold it) I entered it on my schedule E and deducted depreciation and listed the principal payment and interest as all rent. Now I have no depreciation (it is all used up) and only have the principal payment and rent to record. I now know I should have used a form 6252 and form 4952. What should I do? I think I paid more taxes because I counted all the payments as rent instead of principal. Can I now start using the correct forms? Last year the income was about $5,000 and depreciation $1,000. Please advise. Thanks.
The legal title is not recorded or transferred until the buyer fulfills the contract’s obligations usually a few years from the Closing. However, your property is considered sold, in IRS rules, when a real estate contract is signed.as you have been treating this as a rental property. If so, you will pay tax on the depreciation recapture as sec 1250 gain taxed at 25% as ordinary income; all of the principalafter the sec 1250recap depre would be taxed at the long-term capital gains rate which, is 0%~ 15%. Any principal payments after the first principal would be tax-free. For example, if you sell a building for $1 million, for which you paid $800k and took $100k in depreciation, your adjbasis would be $700k. If the buyer on the contract gave you a $200k down payment, you would pay $25k in tax on the $100k of recaptured depreciation and $15k in tax on the $100k in capital gains as I assume that your tax bracket is higher than 15%.From the seller perspective, the capital gains would be recognized as an installment sale and would be recognized proportionally as the principal payments are received. As a seller, you cannot depreciate the property. You would report interest income on the mortgage payments received, and the mortgage payments you make would be deductible as investment interest on Sch E. It’s a great tax advantage to pay capital gain tax over the years through installment sale if you have a sizable gain.. I guess you need to File Form 1040X by the latest of:
3 years from the date you filed your original return for the year for which you made the contribution or 2 years from the date you paid the tax for the year for which you made the contribution. Please contact a CPA/an IRS EA in your local area for more accurate info in detail for your fed/state returns.