Video instructions and help with filling out and completing Can Form 4797 Beginners

Instructions and Help about Can Form 4797 Beginners

Hi everyone this is Phil Jaeger of Jaeger CPA Review I thought I'd go over a few sections of the Internal Revenue Code dealing with regulation that gives people trouble the first item I want to talk about is section 1231 now a section 1231 asset is a non-capital asset but it may get capital gain treatment to be a section 1231 asset first of all it must be either personal property or real property used in a trade of business and it has to be held more than 12 months now let's deal with one type of personal property using the trade of business which is held for more than 12 months that is a section 1231 asset and let's assume that we're going to sell this item and that item is equipment so we have a piece of equipment that we're going to sell selling price is $50,000 the cost of the equipment was 20,000 and we took depreciation of 4,000 dollars giving me a basis of 16,000 dollars now if I compare my selling price of 52 my base of 16 there is a gain on the sale of this asset for $34,000 now if it is a Section 1231 asset how do you treat this gain as far as whether it's ordinary capital or whatever well first of all whether you are a corporation or a sole proprietor the rule is the same as well as how you treat the gain the first thing is you got to recapture some of the gain which means that treated as ordinary income and the amount of the game that's treated as ordinary income is the depreciation taken so we took 4,000 of depreciation that 4,000 of the 35 $1,000 gain is ordinary income and it is called section 1245 gain so therefore 4000 of the 34 would be section 1245 gain ordinary income now the balance of the gain which is 30 thousand dollars would be long-term capital gain known as section 1231 gain so this is the way you treat the gain whether your corporation or sole proprietor sells it now let's take some real estate such as a building and once again it is a Section 1231 asset as long as what we held it for more than 12 months and is put in a trade or business so we sold this real estate for $50,000 the cost of the real estate was $20,000 and the depreciation taken was $4,000 giving the basis of 16 and the selling price 50 basis 16 we have a gain on this of $34,000 now let's assume we have a sole proprietor who sold this real estate this section 1231 real estate well if it's a sole proprietor all the gain 34,000 is treated as a long-term capital gain and long-term complications are called section 1231 gains so if it's a sole proprietor all the gain is section 1231 gain but if you have a corporation who sells this real estate there's a different rule which means that you have to recapture some of the gain as ordinary income and that is called section 291 gain so the again that section 291 gain for the sale of a building or real estate which is a section 1231 asset by corporation says you have to take 20% of the depreciation 20% of 4,000 is $800 and now will be treated as that will be treated as ordinary income under Section 291 now the balance of the gain is section 1231 gain which is what long-term capital gain and that would be all right I think we subtracted here this was 34,000 total gain 800 was ordinary income which is 20% of the depreciation taken the balance is 30 $3,200 that would be section 1231 gain which is long-term capital gain now notice in these transactions you'll always recapture the ordinary income first if any of the gain is ordinary income now let's talk about another one which is section 12 by the way these two items deal with makers depreciation which means their assets are placed in service starting in 1987 now what about those assets that were placed in service prior to 1987 well if the replacement service prior to 1987 the depreciation rules that we use back then was called acres so I have some real estate which I actually write placed in service prior to 1987 and we were using the acres method now under the acres method we can actually depreciate real estate using accelerated depreciation so let's take this scenario we have some real estate which is 350,000 dollars and the basis of the real estate is $200,000 so we sold it we would have a gain of one hundred and fifty thousand dollars now this is called section 1250 property what it is it is real estate that was placed in service pride in 1987 under Akers when they could take accelerated depreciation so let's assume this company took accelerated depreciation and by the way there are tables back then of $100,000 now the company now goes back and recomputes the depreciation as though you they were using straight-line depreciation now the lives back then were fifteen eighteen and nineteen year so let's assume that if they took straight-line the depreciation would have been $70,000 so when you calculate the gain on this the amount of accelerated depreciation as you took in excess of what you could have taken have you taken straight line that amount is recaptured as ordinary income and that is called section 1252 ordinary income so that would be $30,000 now the balance of the gain would be 120,000 dollars which would be a section 1231 gain which is a long-term tap gain now if the company didn't only if company only took straight-line depreciation there would be no recapture which means that if they only took straight-line depreciation all the game would have been section 1231 gain so don't