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Old 04-08-2019, 12:04 PM   #21
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Originally Posted by pb4uski View Post
If you sell for $1.5m then your basis is $0.5m so you have a $1.0m gain.

$0.5m of the gain (equal to depreciation you were eligible to take, whether you took it or not) is a 1245 gain subject to 25% tax and the remaining $0.5m is LTCG subject to 15% tax (or more depending on income).

This thread relates to whether the 1245 gain is subject to a QBI deduction of 20%, which would reduce the 1245 gain from $0.5m to $0.4m.
And a tax of $100K on the $0.4M, right? If so, I think I got to the same place in a different manner.

If you sell the property, don't you have the 1245 gain whether you decide to take it or not? How would you not take it?
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Old 04-08-2019, 12:10 PM   #22
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On the second part, what I was trying to say is that you have a 1250 gain (25% rate) even if you didn't claim depreciation in past tax returns while you rented the property.... so if you could have taken depreciation but for whatever reason didn't then you still have a 1250 gain that is subject to the higher rate.
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Old 04-08-2019, 06:05 PM   #23
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Capital gains are specifically excluded from QBI. Unrecaptured section 1250 gain on sale of real estate (often informally referred to as "depreciation recapture") is a capital gain and thus would not qualify. It's taxed at a special maximum capital gain rate of 25%.

OTOH, section 1250 gains due to "additional depreciation" in excess of straight-line (true depreciation recapture), would be taxed as ordinary income and would thus qualify for QBI. I think this is somewhat rare as SL depreciation has been in effect for a long time.

In addition, section 1245 recapture is taxed as ordinary income and would qualify for the QBI deduction. So this would cover any furniture or equipment that was part of the sale of a rental property... probably pretty small by comparison to the real estate itself.

Any form of "recapture" on short-term sales (rental property held less than 1 year) would also be taxed as ordinary income and would thus qualify for QBI. Again, pretty rare. Plus there would not be much depreciation or gain in such a case.

I just ran a test case in TurboTax Premier for a single taxpayer with only some interest income and the sale of a rental property held for 10 years. I told TT it was a qualified business. The gain on sale was taxed entirely at capital gain rates. This was a combination of unrecaptured section 1250 gain (to the extent of accumulated straight-line depreciation) plus regular CGs for the remainder of the gain. The only QBI deduction allowed was for 20% of ordinary rental income generated in 2018.
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Old 04-08-2019, 06:07 PM   #24
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Quote:
Originally Posted by pb4uski View Post
If you sell for $1.5m then your basis is $0.5m so you have a $1.0m gain.

$0.5m of the gain (equal to depreciation you were eligible to take, whether you took it or not) is a 1245 gain subject to 25% tax and the remaining $0.5m is LTCG subject to 15% tax (or more depending on income).

This thread relates to whether the 1245 gain is subject to a QBI deduction of 20%, which would reduce the 1245 gain from $0.5m to $0.4m.
In each case replace 1245 with 1250.
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Old 04-14-2019, 10:02 PM   #25
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What I do know is that when I sold my last property, the depreciation recapture was calculated on line 38 of the Schedule D Tax worksheet. The latest version is located at the following link, and line 38 still shows multiplying by 25%. Again - I have not gone through it all so maybe the total depreciation amount is subtracted out somewhere else due to QBI.
https://www.irs.gov/pub/irs-prior/i1...18.pdf#page=16

In the previously linked articles, I agree they don't address QBI but they were written in 2019:

Zacks article: Your capital gains tax is based on your regular tax bracket, while your unrecaptured Section 1250 gain is a flat rate. For 2018, long-term capital gains are taxed up to 15 percent for high earners, and the unrecaptured Section 1250 gain is now a flat 25 percent. So you’d pay 25 percent on $20,000 of the sale and up to 15 percent for the other $80,000, depending on your income.

Balance article: Depreciation recapture can cause a significant tax impact if you sell a residential rental property. Part of the gain is taxed as a capital gain and might qualify for the maximum 20-percent rate on long-term gains, but the part that is related to depreciation is taxed at the higher tax rate of 25%
So this rate of 25% is a unique category, not related to the more familiar 0%, 15, 20% brackets? Is this a new thing? The Kiplinger's article on how to do depreciation recapture doesn't mention this:

https://www.kiplinger.com/article/in...nsequence.html

Compare your realized gain with your depreciation expense... The lower of the two figures is the amount the IRS considers subject to depreciation recapture at your ordinary income tax rate. In this case, $10,000 is subject to depreciation recapture at your ordinary income rate. The remaining $5,000 is taxed at the capital gains rate.
***
EDIT - hold on, these two articles contradict each other:
Zacks article: your unrecaptured Section 1250 gain is a flat rate. ... and the unrecaptured Section 1250 gain is now a flat 25 percent.
vs
Balance article: the part that is related to depreciation is taxed at the higher tax rate of 25%
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