Tax I have a 10 rental properties, I sold one in 2006. Is the profit I made capital gain?

Question

The properties are owned by an LLC and income is reported on 1065. I have been depreciating the property, and have a $30,00 gain over the adjusted basis. If this is capital gain, how do I show this on the 1065 and schedule K.. Ihave used turbo tax and they have put this as ordinary gain.

Answer 1

Here ya go -
You need to separate the various classes of assets first.

Land
Building & Improvements
Furniture, Fixtures and Appliances.

After you have your numbers all in a row, you need to see what you sold and how much of the sales price was attributable to each class. 9 times out of 10 the sales contract will be silent. Typically the Furniture and Appliances have little to no value.

Check the dates you entered, and see if the sale is long or short term first. Make sure the date of sale and date of purchase are correct in the computer. That will likely cure 90% of your problems.

The gains will originally be reported on 4797, most of your income should ultimately be reported on Schedule K (Pg. 3) rather than on page 1 of 1065.

Lets deal with the last first -
Sales of appliances are sales of section 1245 property. Any depreciation taken over the life of the asset(s) will be recaptured as ordinary income. Any sales price over original histroical cost will be section 1231 gain. Losses from sales of section 1245 property convert to section 1231 losses. The 1245 assets are reported on page 2 of the Form 4797.

Section 1231 is what accountants refer to as "the best of both worlds" - a loss is ordinary, gain is capital. (On a Net basis)

Sale of Building is a sale of a section 1231 asset. The building will be a sale of a capital asset on form 4797. Where it appears on the form, and perhaps the final treatment of the income will depend on holding period. (Come to think of it, check to be sure that you entered the sale as long term in turbotax. If you put "various" as the purchase date you'll need to define holding period. Typically with a "S" or "L" for short or long. Many systems will assume short.) Sales price minus Basis (Net of depreciation) = section 1231. Gain is capital, loss is ordinary. (this ultimate treatment happens at the individual level. Section 1231 goes right from form 4797 to schedule K (Pg 3) Any depreciation taken on the building & Improvements, since date placed in service would then be called "Net Non Recaptured Section 1250 Gain". To put it more simply, The portion of the amount shown as section 1231 gain that is subject to 25% tax rate rather than 15% LTCG rate.

Land -
Good ole plain & simple. 1231 asset as it was used in a trade or business. Sales price - cost. There is no depreciation here.

Other considerations -
You could be getting ordinary tax rates on the section 1231 gain due to "Recapture of prior years section 1231 losses". Assuming you've used Turbo tax for the past 5 years this would be correctly tracked by the software. You have different numbers for both AMT and regular tax. THIS IS AT THE INDIVIDUAL LEVEL, not at the partnership level.

Any income from the sale of the buildings is likely passive. I say likely as you mention you own 10 properties and I do not know if you're a "materially partcipating real estate professional". Passive income will free up any suspended passive losses at the individual level. Check form 8582.

Any chance you may have paid AMT? Look at form 8801 and the instructions.

I know there are energy credits for individuals this year, they may also qualify for a partnership, I think the form is 5965

Answer 2

The portion of the gain attributable to depreciation is called Section 1250 gain taxed at a maximum rate of 25%. It could be that all of your gain is Section 1250 gain depending upon depreciation claimed. If not the remaining gain due to appreciation is long term gain taxed at 15%.

Answer 3

If you have entered the data correctly, then the gain is ordinary gain, not capital gain. Capital gain is due to appreciation. Ordinary gain is due to recaptured depreciation.