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

Instructions and Help about Can Form 4797 Businesses

In this video I'm going to discuss the treatment of the sale of a rental property for tax purposes and I will also point out some IRS resources that can be referred to for additional information and general I'm talking about a rental property is one that you've owned for more than a year and you rent to tenants and when you file your tax returns into the year you file a Schedule II in which you recognize the income and expenses related to the property this is considered a trader business having a rental property it's also considered a passive investment and for the sale of rental property we'll see in this publication it is specifically defined as not a capital asset and as a result it is what's considered a section 1231 asset and you must follow section 1231 rules it may end up being treated as capital gain or a portion of the gain may end up being treated as capital gain however there are additional rules starting with section 1231 property on Form 47 ninety-seven is where the gain or loss is calculated which is step one when you're dealing with your sale of rental property the sale price is fairly explanatory there are very specific rules for what can be included in all of these however the cost basis is not simply what you paid in general it would be what you paid plus any other fees related costs also any improvements you did to the properties or remodels that were not deducted as expenses on those schedule e's increase the basis so you add them to your cost and then a critical piece in the sale of a rental property is all the depreciation expense that you took you're scheduled EES attached to your tax return you have to add up all depreciation expense that has been taken on the property and then you decrease your cost basis by that amount so sometimes you can end up with a gain when you thought you had a loss so first dealing with the gain side if you have a gain section 1252 lap line basically section 1252 lar just recapturing the depreciation expense that you've taken so that total depreciation expense that you have taken on all of your tax returns over the years to the extent that your gain is greater than that you will only take the depreciation expense or if the depreciation expense exceeds the gain you would simply take the gain amount taxed at the the taxpayers rate based on how much income they had however that is limited to 25% and then any excess gain after recapturing that depreciation expense they took is considered capital gain tax at the preferential rate of 15% or 0% if you're in a lower bracket also one thing to know if you acquired the asset a different ways other than by buying it outright there are very specific rules for calculating basis for gifts or section 1231 exchanges or involuntary conversion etc for more information on section 1231 transactions and depreciation recapture you can refer to publication 544 so if you had a net loss after subtracting the sales from the adjusted basis and the property then in general section 1231 losses are only deductible from section 1231 income they can only be used to offset it how ever we said that rental property is passive activities so that loss is calculated on Form 85-82 and there is one large exception to the rule that's section 1231 losses are only used to offset section 1231 income which in general is rental property there are a few other specific more rare situations that qualify as section 1231 transactions however the exception for rental real estate for individuals with active participation is that they get to deduct it $25,000 of loss if they have it passive activity loss on the page one of their 1040 tax return and that amount can create a loss and NOL if it exceeds all of your income from other sources and also that $25,000 deduction is phased out if your modified AGI which is a specific calculation is between a hundred thousand and one hundred and fifty thousand and this $25,000 deduction of allowance is disallowed over a hundred fifty thousand a modified AGI if you had this same passive activity loss special allowance applied for while you are renting the property also if you had a loss you could deduct up to twenty five thousand a year from ordinary wages any income and some just some other things to be aware about the at-risk rules also may apply which are discussed in forum sixty one ninety eight and the instructions are located here also but basically if you weren't liable for the property so if you had some sort of fancy ownership or you were not going to be liable for the loss of the property entirely then some of these rules may apply and affect your gain and loss calculation and all of the instructions the IRS has instructions reforms the publications and instructions come in a web template where you click on all these topics or a PDF version for your convenient viewing.

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