Video instructions and help with filling out and completing Where Form 4797 Recapture

Instructions and Help about Where Form 4797 Recapture

Hello in this video we'll discuss section 1245 depreciation and amortization recapture now before we go into the specifics and the rules that apply let's talk about the problem in the solution of why we would have section 1245 recapture now recapture just means recharacterization we've been talking a lot about recharacterization rules when it comes to tax characterizations all about the character of the gain or loss so if you recall from the general concepts video of characterization there's really ultimately two different characters of gains or losses there's ordinary and there's capital now within capital we can have long term and short term but ordinary has just treated as ordinary we don't have a distinction between long term and short term if you also remember that there's a preference if a tax payer generally has in general a tax payer if they have a game they want long term capital gain but if they have a loss they want ordinary loss and the reason for the for the capital gain is because long term capital gain usually will result in preferential rates ordinary losses have last limits than capital losses and also being able to offset an ordinary ordinary income with ordinary loss gives a better greater tax benefit so we want to get long term capital gain if we have gate so keep that in mind for this video we want long term capital gain if we can get it okay and that's a lot of what you're gonna see a specific the problem the solution would apply with section 1245 so keep that in mind we want to get long term capital gain if we have gate so here's the problem in the other characterization videos we talked about sale or exchange so generally get capital treatment you have to have a sale or exchange with respect to a disposition now you can have involuntary conversion if you go through section 1231 but those are really the only ways that you potentially can get capital gain or capital loss sale or exchange the normal rule and there's a one little carve out for involuntary conversion in Section 1231 what if you don't have sale or exchange okay so I'm talking about here is every income loss deduction item can be characterized some way so what if you're simply depreciating property if you're depreciating property are you selling exchanging or do you have involuntary conversion no depreciation is not a sale or exchange or involuntary conversion of property depreciation is simply just reporting a deduction related to the economic obsolescence or wear and tear on property that we have through the tax code we have a set of rules of how we actually quantify that we'd appreciate it okay very similar to our accounting method for depreciation so depreciation is not a sale or exchange or involuntary conversion so that means it can never be treated as capital character so whenever a business or if you have invested a property and you have depreciation or amortization it's going to be an ordinary deduction an ordinary deduction on the tax return an ordinary deduction okay that's going to be remember in previous depreciation amortization videos you can get depreciation through trade or business activity or investment you can't get it on personal activity property right that's very important that's from the big three with the with respect to the deductions please see that video that discusses what exactly trader business what exactly investment it's very important concept to understand again you can't get depreciation on personal activity property at your personal house your personal car and you don't get to depreciate the car you drive around personally okay so that's the important part ordinary deduction okay it's an ordinary deduction again trader business investment now what happens if we sell that that depreciable property later on so we sell that depreciable property later on so during the life we were depreciating we were getting ordinary deduction okay let's say it's business property let's say it's business property and we sell it let's say we'd appreciate it we at five years we've been depreciating it over those five years it still has two years left to appreciate seven-year well three years left its seven-year property but it's gonna be depreciated over eight years we sell it and when we sell it let's say the property results in section 1231 gain or law or just straight-up long term capital gain remember that section 1231 can potentially result in long term capital gain okay under the main Hodge pot see that video to refresh your memory or along could just mean straight long term capital gain may be its investment property which is a capital asset we're selling it right and if it's been held for more than a year which it has because we bought it five years ago right it could be 1231 gain or long-term capital gain so you've got these ordinary benefits but then when you sell it you get this preferential treatment through long term capital gain or section 1231 so the problem is that Congress saw this as an abuse mechanism people were getting this ordinary deduction and they were lowering their tax rate they were being a tax benefit right they were lowering at forty percent or more but then long-term capital gain came around and they were being taxed at 20% tax rate do you see the issue you were being you were basically netting a positive twenty percent okay over over that period of time because depreciation reduces basis and that's a recovery of capital and as your basis goes down when you sell it you don't get to recover that upon sale so the idea is that the it's a matching issue the problem is that it's not matching does not match correctly in Congress that we have to come up with a solution for this which really in your