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

Instructions and Help about Can Form 4797 Deductions

Hello and welcome to this lecture this is Professor Farhad in this session we would look at section 1245 recaptures so what is section 12 1250 not 1245 section 1245 in concept is very similar to section 1245 so if you don't understand what section 1245 is go back and review section 1245 basically we are recapturing depreciation as ordinary income when we sell a 1245 asset which is a personal property now section 12 50 silver in concept it's not the same otherwise you will not be covering it separately so the government it's a little bit nicer when it comes to real property so they want you to recapture with our special rules on how much are you going to recapture so depreciation recapture so depreciation recapture for section 1250 property only applies to depreciable real property and you're gonna see why that is residential rental real estate so residential rental real estate acquired before 1987 and you're gonna see why acquired before 1987 or non-residential real estate which is business commercial real estate acquired before 1981 and you're gonna see in a moment why those dates are important okay so think about it any property that was acquired before those states it's already fully depreciated it only applies to the to those so section 12 1250 around Lee applies since only the amount of additional depreciation is subject to recapture what is the additional depreciation the additional depreciation over the straight-line okay so to have additional depreciation the property must have used something some form of accelerated depreciation of hopefully you learned in tax one that we use for real property we use the straight-line so the only depreciation that we will need to recapture is the additional depreciation and access of the straight-line okay so to have additional depreciation accelerated depreciation must have been taken on the asset and when was the accelerated depreciation used to be an acceptable depreciation method prior to 1987 okay prior to 1987 for residential real estate and before 1981 for non-residential okay so only the DP 1250 recapture applies to those asset so guess what straight-line depreciation is not recaptured so if you sold an asset spend a real estate property and you use the straight-line method which is means simply you bought it after 1987 the 1250 recaptured to recapture the depreciation as ordinary income does not apply obviously of course if you sold this property less than a year because if you sold the property less than a year remember that's not a 1231 property if you sold it if you hold it only less than a year because you never took depreciation so the pre shovel real property placed in service after 1986 can generally only be depreciated using the straight-line so after 1986 were only we can only use the straight line therefore the depreciation recapture does not apply to property that's the appreciated using the straight line that's why the government is a little bit nicer when it comes to real to real property versus the 1245 property it doesn't matter what which depreciation method you are using you have to recapture the depreciation that you took as ordinary income if you sold the asset at a gain therefore no depreciation recapture potential for such property and obviously Section 1250 does not apply if the real property is sold at a loss so if it's sold at a loss its sold at a loss it's worth 31 loss so depreciation recapture does not apply so how do we have what's the formula for the nut for the depreciation recapture look it's for the additional depreciation okay the additional depreciation what's the additional depreciation the access the accelerated method and access of the straight-line so that's the amount that we will recapture as ordinary income so to figure out how much is the ordinary income recapture with it's the lesser of two figures additional depreciation how do you figure additional depreciation accelerated depreciation access of the straight line or the recognized gain which one of these is smaller we would look and we will figure out how much should be recognized as ordinary income so this is where the true were the true recapture occurred but not for the depreciation for the additional depreciation so let's take a look at an example to illustrate this point so I'm gonna work this example on the excel sheet and as I'm doing this you should copy the numbers down to see if you could figure out what's going on so let's start by looking at a purchase so we purchase an asset on one one nineteen eighty so the first thing well it's one one 1980 so we must be using what a different depreciation method than the straight line because that was allowed back then so we were depreciating this asset using the accelerated method the other fact that we're gonna give you is I'm gonna give you as the asset was sold for one hundred and eighty thousand so this asset was sold for one hundred and eighty thousand okay more information accelerated math accelerated depreciation on this asset was 150 this is how much accelerated depreciation we took on this asset straight-line depreciation should have been one thirty straight line should have been one thirty now what is the access of depreciation what's the additional depreciation the additional depreciation is twenty thousand okay because we're using a different method than the straight-line we have additional depreciation what does it mean we have additional depreciation it means some of the depreciation it's gonna be considered as ordinary income okay it's gonna be considered an ordinary income and what I want you to do now just calculate the adjusted basis for the property so the adjusted basis for the property is what is the 220 minus the 150 so the adjusted basis is seventy thousand okay and we're gonna have to calculate the adjusted basis for