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

Instructions and Help about Can Form 4797 Comments

This review is for depreciation recapture provisions on page 7 - 21 of your text recall that business assets are considered Code section 1231 property so these assets are broken down in to land which is not depreciable so it is a pure section 1231 asset or its personal property like equipment furniture and computers that's section 1245 property and these items are depreciated then you have real estate and other like rental property and other real property that fall under Section 1215 these items are depreciated also so when we sell section 1245 and section 1250 assets we have to remember the depreciation recapture provisions when we sell assets some of the gains are get preferential tax treatment or lower tax rates so gains on depreciated property like section 1245 and section 1250 assets occur because every time an asset is depreciated its basis gets lower and lower so if there's a gain on section 1245 or section 1250 assets some of it may have been due to the depreciation lowering the basis of the asset so since businesses have already benefited from taking depreciation on assets as an expense year after year the IRS does not want businesses to get another tax benefit by getting preferential tax treatment on gains due to depreciation therefore we have to look at section 1245 and section 1252 section 1252 12:45 games first so section 1245 assets our personal trader business property subject to depreciation like we have up here equipment furniture and fixtures so any gain on the sale of section 1245 assets in excess of depreciation gets preferential tax treatments or capital gain rates and we know that those are lower than our ordinary tax rates that we typically pay then the gain on the amount of depreciation is taxed at regular or ordinary rates and this is called our depreciation recapture and it gets no special tax treatment so let's take a look at our example here you'll find that on page 7 - 17 of your text so it says on May 1st 2022 Jason purchased equipment costing twelve thousand for his business depreciation deducted on the equipment in previous years was 73 92 so the adjusted basis of his equipment is 4608 so the equipment cost twelve thousand but we've taken depreciation so the basis has been lowered all the way down to 4608 so now we're going to look at some independent situations where there was a sale of this equipment okay so in situation one Jason sold the equipment for $13,000 his basis as indicated in the problem is 4608 so that gives us a big gain of eight thousand three hundred and ninety two dollars however some of this gain is attributed to the amount of depreciation and that the company has already benefited from taking this depreciation in the past so we only get preferential tax treatment on the amount of the gain that is in excess of the depreciation so the gain was eighty three ninety two the depreciation recaptured as given in the problem up here was 7392 so the difference is one thousand so the one thousand dollars gets capital gains treatment or a very much lower tax rate whereas the 7392 portion of the gain is taxed at ordinary rates okay so now let's look at the situation to where jason sold the property for nine thousand dollars okay once again we have a basis of 4608 so his gain is four thousand three hundred and ninety two dollars his gain is lower than what his depreciation was so none of the gain is in excess of the depreciation taken in the past so zero is the amount that gets preferential tax treatment so the entire forty three ninety two of the gain is taxed at ordinary tax rates okay so in situation three we have a loss so we don't have to worry about the gain or recapture so we just get an ordinary loss on our books next we'll look at section 1250 property recall that section 1250 a sets are depreciable real property used in a trade or business such as an office building or residential real estate and the gains are treated very similarly to the way the section 1245 games were treated so the amount of capital gain attributable to depreciation previously taken is taxed at the 25% rate up to the depreciation amount considered and recaptured so this is like the depreciation portion of the gain for the section 1245 property except we don't tax it at ordinary rates we tax it at the 25% rate so any remaining gain in excess of the depreciation gets preferential tax rates so let's look at the example that we're given down here so here we're going to calculate the gain and then also calculate the tax that that is applied to the gain so Joe used a building in his trader business that he purchased in June of 2022 four hundred and sixty five thousand he sold the build the building in June of 2022 assume straight-line depreciation was taken in the amount of 16 thousand nine twenty seven so the adjusted basis of the building is a hundred and forty eight thousand $73 we started at 165 and we have to reduce the basis by the depreciation that was taken so that lowers the basis to 148 148,000 $73 so we're going to look at these independent situations and we're assuming that the capital gains rate the preferential tax rates will be 15% so Jose sold in situation one the building for a hundred and seventy two thousand we were told that the basis is 148 seventy three so we have a gain of twenty-three thousand nine twenty seven okay so the depreciation was sixteen nine twenty seven so the amount up to the depreciation of the game is sixteen thousand nine twenty seven that's going to be taxed at 25 percent that.

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