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Old 03-01-2013, 02:01 PM
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Sale of second home

We sold our cottage over this summer at a profit. It was purchased in 1999. This cottage was rented out yearly to others, but used more than the 10% or 14 days limit. Expenses and depreciation were allocated using the tax court method on Schedule E. I have all records. I need some additional guidance on the items below, and haven't found any specific examples on the IRS website:

1. Although (I think) the property is a residence, I believe that the gain has to be reported as a section 1250 on form 4797 to recapture the depreciation and tax it at a higher rate. Is this correct? (or not, see next question)
2. Per a TurboTax Help box that I've just found, I'm supposed to enter the business portion on 4797 by calculating the average business use (~70%) and entering that portion on the 4797, and the balance on schedule D. If the property cost basis were $100K, and the sale price $300K, do I report $70K, and $210K on the 4797 and the balance ($30K and $90K) on Schedule D? Ignoring the depreciation (which goes on the 4797 no matter what), both would be LT gains and my net tax would be the same- I don't see the point.
3. Would an upgrade to Premier TurboTax cover the calculations above for me? I can do them manually, just worrying about missing a small detail.
4. Over the years a number of 5 year life items have been depreciated to zero, and were sold with the cottage. Do these have any effect of the capital gain calculation?
5. I have several 5 year life items part way thru depreciation that were sold with the cottage. Same business/personal split as above. No discrete line items of cost were in the sales contract. Total value was ~$700 and there's been a total of $190 in depreciation taken. What do I need to do?
6. Info-
TurboTax has data on 4797 P1 line 1 (1099S), 6 & 7 (gain), 9a (gain to Schedule D line 11), Page 2 line 19A (date of ownership/sale), 20 (gross sale price), 21 (adjusted cost basis), 22 (depreciation taken), 23 (adjusted basis), 24 (total gain), 26g (0), 30 (total gain), 31 (0), 32 & 32b (gain). Also completed was an uncaptured 1250 gain worksheet. The result was a 15% gain on the appreciation and a 25% tax on the depreciation calculated by the Schedule D worksheet on lines 21 through 25.



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Old 03-02-2013, 09:09 AM
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“1. Although (I think) the property is a residence, I believe that the gain has to be reported as a section 1250 on form 4797 to recapture the depreciation and tax it at a higher rate. Is this correct? (or not, see next question) “=== I guess it is neither sec 1245 nor sec 1250 ; it is unrecaptured depre on r/e and a special 25% tax rate applies to r/e gains attributable to depre previously taken and not already recaptured.When your tax rate is only 10 or 15%, the depre recap will be taxed at 10 or 15% to the extent of the remaining amount in 10 or 15% bracket and then at 25% . There is a limit on the capital gains exemption of $500K for married joint filers. If you sold a principal residence(by convertingrental pty to residence) and then lived in the vacation home as a principal residence for two years out of five, the second home could then be sold and receive the same exclusion from gross income on any gains from that sale.As lon gas you dispose of the pty , second home, as rental pty, then, it is reported on IRS Form 4797. If there was any rental activity in the year the property was sold, the rental income and expenses are reported on Sch E.You need to enter the sale proceeds on line 1 of Form 4797. The proceeds will be reported to you on form 1099-S. Form 1099-S will be mailed to you by January 31 of the year following the sale.
“2. Per a TurboTax Help box that I've just found, I'm supposed to enter the business portion on 4797 by calculating the average business use (~70%) and entering that portion on the 4797, and the balance on schedule D. If the property cost basis were $100K, and the sale price $300K, do I report $70K, and $210K on the 4797 and the balance ($30K and $90K) on Schedule D? Ignoring the depreciation (which goes on the 4797 no matter what), both would be LT gains and my net tax would be the same- I don't see the point. “========As long as your second home is sole as residence, then, your second home is considered a personal capital asset. Use Sch D (Form 1040) and Form 8949HOWEVER, as logn as it is sold as rental /personal purposes, then, you need to report 70% of the gain on4797 and 30% of the gain on Sch D/8949.
“3. Would an upgrade to Premier TurboTax cover the calculations above for me? I can do them manually, just worrying about missing a small detail.”= I guess you need to contact the TT software vendor for more info in detail.
“4. Over the years a number of 5 year life items have been depreciated to zero, and were sold with the cottage. Do these have any effect of the capital gain calculation?”========I guess it is sec 1245 items then you also need to recapture the unrecap depre and it will reduce your LTCG amount and increase ordinary income to the extent of unrecap depre amount. Depreciation recapture is essentially a specially-taxed type of capital gain, realized when you sell your investment/rental property. Depreciation recapture means you must take the sum of all previous depreciation deductions on the property and count it as ord. income. If you sell your investment/rental property for a gain, the depreciation will not offset capital gains tax. The capital gains tax rate is lower than the depreciation recapture tax rate. As depreciation reduces the adjusted cost basis for your property, it is likely the gain on the sale of the property will be higher. However, your liability for depreciation recapture tax can be offset by passive activity losses, which become fully deductible upon sale of the rental property. Rental income is considered to be passive income, and when a renter fails to pay the rent, it can be considered a passive income loss.
“5. I have several 5 year life items part way thru depreciation that were sold with the cottage. Same business/personal split as above. No discrete line items of cost were in the sales contract. Total value was ~$700 and there's been a total of $190 in depreciation taken. What do I need to do?”===========As said above you need to recapture the unrec ccptured depre of $190 and this will reduce the amount of your LTCG by that amoun t and increases ord gain amount by that amount; The $190 is taxed at 25% unless your marginal Tax rate is lower than 25%
6. Info-
“TurboTax has data on 4797 P1 line 1 (1099S), 6 & 7 (gain), 9a (gain to Schedule D line 11), Page 2 line 19A (date of ownership/sale), 20 (gross sale price), 21 (adjusted cost basis), 22 (depreciation taken), 23 (adjusted basis), 24 (total gain), 26g (0), 30 (total gain), 31 (0), 32 & 32b (gain). Also completed was an uncaptured 1250 gain worksheet. The result was a 15% gain on the appreciation and a 25% tax on the depreciation calculated by the Schedule D worksheet on lines 21 through 25.”=======>. I am not familiar with TT software; I guess you can get professional help form TT software vendor.



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Old 03-03-2013, 11:25 AM
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TurboTax is handling the 5 year items in this way: The "business basis" value (~70% of the purchase price) has been depreciated to zero. If I assume the value was zero in the transaction, there's no income to report.
If I assume that each of the items has a residual value greater than zero, i.e. $10, this value appears as a 1245 gain in Part III of the 4797. Math goes like this: Cost basis ($200)- depreciation ($200)= adjusted basis ($0). Sale price ($10)- adjusted basis ($0)= gain ($10). This 1245 gain is posted to lines 31 & 13 on 4797, then to 1040 line 14 as ordinary income. The total value of these items (~$1000 which is <1% of the overall transaction) could be split out of the overall business transaction. This would mean that ~30% would be reported on 8949/Schedule D, 69.5% would be reported as a 4797 1250 gain, and 0.5% would be a 4797 1245 gain.

For the 5 year items that are part way through depreciation, a sale value equal to the adjusted basis would need to be assumed to zero the transaction, otherwise its a 1245 loss.

Does anyone else suggestions? Should these items be broken out as 1245? They could also be lumped into the residence transaction by adding to the basis, and depreciation which would essentially zero out the gain/loss.



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