I have confusion about how to report unrecaptured section 1250 gain on scheduled D. May taxes are pretty simple other than the following (i.e. I'm not in a partnership, don't have foreign income, etc. I just have W2 Income and some mutual funds that report 1099 forms to me)

I'll try to keep this as simple as possible, but I'm confused about how/where to report gains without double counting.

The Facts:
*I sold my (former) primary residence in June 2011.
*I moved out of this house in Aug 2008.
*I tried to sell, but couldn't, so I rented it from Dec 2008 to Jan 2011
*I sold the house in June 2011 (it was unoccupied form Jan to June 2011)
*I claimed ~10K of depreciation using MACRS to offset rental income while it was rented.
*I received a form 1099-s substitute form when I sold the house

What I think I Know:
*I qualify for an exemption of capital gains on the house (since I used it as my main home for 2 of the previous 5 years)
*the ~$10K of depreciation will result in my not being able to exempt the full amount of the gain. It will be treated as an unrecaptured section 1250 gain.
*I must fill out from 8949 because I received form 1099-s (and I don't qualify to exclude all of my gain).
*I must fill out form 4797 because it was a rental house at the time of sale.
*Filling out Form 8949 suggests there is a $10K reportable gain (the amount of the deprecation) and tells me to report that on line 10 of Schedule D.
*Form 4797 also results in a calculation of the $10K gain, and Schedule tells me to report on Schedule D line 11. (this would seem to double count the gain)
*I am filling out form 4797 b/c it was a property used for business purposes at time of sale.
*Line 14 of the 1040 itself is a place to enter "Other Gains or Losses", and all the 1040 instructions say is "If you sold or exchanged assets used in a trade or business, see Instructions for form 4797" (this would seem to triple count the gain)

These last few items would seem to suggest that I am double (or triple) counting the gain on schedule D, and this is the source of my questions.

Did I fill out the forms wrong? (either 8949 or 4797... However, they seem like their intent is to measure the same thing in my case)

Do I not really need to report the $10K of depreciation as a gain, thereby making the reporting of it irrelevant?

Do I not need to fill out form 4797 b/c it wasn't actually renter-occupied at time of sale?

Is Line 14 of the 1040 irrelevant for me?

Many thanks to anyone who can help...

Some additional facts if it helps:

I bought the home in 1999, so I lived in it for many years prior to moving out in Aug 2008.

There was plenty of gain on the house, but the house sold for less than $250K, so there is no concern about exceeding exemption limits.

Thanks.

“I qualify for an exemption of capital gains on the house (since I used it as my main home for 2 of the previous 5 years)”----> So, you lived in your home as a primary residence more than two years( for 9 years in your case form 199- Aug. 2008), but decided to move out and turned the property into rental housing. If you sell the property less than three years after you moved out, you still qualify for that primary residence exemption of $250,000 or $500,000. So if your gain (profit) is less than those thresholds, $250K, you will have no tax to pay on your gain, though you will have to pay depreciation recapture tax on the amount that you depreciated the property while it was a rental. Any depreciation allowed or allowable during the period that it was rented out is recaptured at sale time and is taxable at a higher rate than normal long-term capital gains, currently up to 25%.In order to survive an IRS audit on the sale if a partial exclusion on any gain is being claimed you will need a professional appraisal of the value of the property as of the date that it's converted to rental use. This is even more important today with the fluctuation in property values over the past few years. Any gain/loss in value going forward once it's converted to rental is treated separately from any exclusion of gain on the sale of a personal residence. Also bear in mind that once it's no longer been your principal residence for 3 years and one day, the exclusion of the gain on the sale of a personal residence is lost entirely. You still have to account for the gains separately (principal residence vs rental) since if there is a loss in value in the property once it's converted to rental that loss CAN be used to offset any other taxable gains. You still have the depreciation recapture to contend with as well and that's addressed as a separate item on Form 4797 when the property is sold.
“*the ~$10K of depreciation will result in my not being able to exempt the full amount of the gain. It will be treated as an unrecaptured section 1250 gain”---->As long as your rental property was depreciated using MACRS method(S/L method), there is NO sec 12500 recap potential; since the use of the S/L method is required for real pty acquired after 1986, there will be no Sec 1250 recap on the disposition of such pty. Sec 1250 recap is rarely seen; however, a special 25% tax rate applies to your real pty gains attributable to depr previously taken and not already recaptured under the Sec 1250 or Sec 1245 rules. Any remaining gain attributable to unrecap depre previously taken is taxed at 25% rather than the long term capital gain rate of 15%. When your tax bracket is only 10 or 15 %, the depr recap will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 15% bracket and then at 25%.

“I must fill out form 4797 because it was a rental house at the time of sale.”---->Correct. The sale of an asset used for business purposes, such as a home that is rented for income, is reported on IRS Form 4797. If there was any rental activity in the year the property was sold, the rental income and expenses are reported on Schedule E just as it was in prior years. You need to enter the sale proceeds on line 1 of Form 4797. The proceeds will be reported to you on form 1099-S. Form 1099-S will be mailed to you by January 31 of the year following the sale. You should skip Parts I and II of Form 4797 since they do not apply to the sale of rental real estate. You should record a description of the rental property on line A of Part III, line 19(a) of Form 4797. You need to enter the date acquired and date sold on lines 19(b) and 19(c), respectively. If you are unsure of the dates to report, review your closing documents from both the original purchase and the sale. The date sold will also be included on form 1099-S. Enter the gross sale price of the rental home on line 20 under the column for Property A. Since you are only reporting one sale on Form 4797, the amount on line 20 will match the amount on line 1. You also should calculate the cost basis of the property, add expenses related to the sale of the property and enter the total on line 21. The cost basis is the amount you purchased the property for. Selling expenses allowed to be added to the cost basis include attorney fees, title fees and recording fees.
“Form 4797 also results in a calculation of the $10K gain, and Schedule tells me to report on Schedule D line 11. (this would seem to double count the gain)”---->You need to add lines 2 through 6 on Part I of Form 4797 and enter the result on line 7. You will also enter the result on Schedule D, line 11 LTCG. Do not record anything in lines 8, 9, 11 or 12 on Form 4797 since these do not apply to rental homes. The gain from the sale of the rental home will be included with the other gains reported on Schedule D and be reported on line 13 of Form 1040.
“Line 14 of the 1040 itself is a place to enter "Other Gains or Losses", and all the 1040 instructions say is "If you sold or exchanged assets used in a trade or business, see Instructions for form 4797" (this would seem to triple count the gain)”----> Line 14 of form 1040 is for assets sold or exchanged assets used in your trade or business NOT for rental pty. Gains on the sale of business assets are ordinary gains and taxed at ordinary income tax rates. These gains do not qualify for capital gains treatment.

Many thanks, this is very helpful.

I did use MACRS, so I guess I have not used the right terminology for the recapture of the depreciation. I thought this was "unrecaptured section 1250 gain." Sorry if that caused confusion.

Based on your description, I think I have filled out form 4797 correctly. It results in ~10K of gain on line 7 (this is the recapture of the depreciation), which is what I understand the intent to be. The rest of the gain on my house can be claimed as a primary residence exemption. Incidentally, it seems the instructions suggest that I write "Section 121 exclusion" on line 2 of Part I in Form 4797, along with the amount of the exempted gain as a negative number in column g. Line 7 then gets reported on line 11 of Schedule D which flows into line 13 of the 1040. All good so far.

Now my confusion comes from form 8949. I know this is a new form, so maybe things aren't well understood. My attempt to fill it out resulted in showing the same ~10K gain. This form tells me to enter the Sale price, cost basis, and adjustments (all of which imply the ~10k gain) on line 10 of schedule D. If I did this, and add line 11 from above, I'm looking at 20K of gain hitting the 1040, line 13. This doesn't make sense to me.

Thanks again.

“Now my confusion comes from form 8949. I know this is a new form, so maybe things aren't well understood. My attempt to fill it out resulted in showing the same ~10K gain. This form tells me to enter the Sale price, cost basis, and adjustments (all of which imply the ~10k gain) on line 10 of schedule D. If I did this, and add line 11 from above, I'm looking at 20K of gain hitting the 1040, line 13. This doesn't make sense to me.”There was plenty of gain on the house, but the house sold for less than $250K, so there is no concern about exceeding exemption limits”--->You are exactly correct. I guess you need to use Form 8949 to report the sale or exchange of a capital asset not reported on another form or schedule. You, as an individual, can file either form 8949 or Form 4797 on Sch D.The instruction states, QUOTE,” Individuals use Form 8949, Sales and Other Dispositions of Capital Assets, to report the sale or exchange of capital assets not reported on another form or schedule. Individuals then use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949.” I guess you need to contact the IRS.

Thanks again for the help, at least I feel more confident I didn't miss something along the way. If I come by a definitive answer, I'll be sure to post it.

I have a very similar situation that taxreformnow posted about and would appreicate some advice.

I bought a house in April 2003 that served as my primary home until June 2008. From then through Aug 2010, I rented the house out, but I also had sufficient personal use of the home so that it was considered a "vacation home" for tax purposes in tax years 2008, 2009 and 2010. For those years, I filed schedule E but my allowable depreciation was limited by Sec. 280A. I stopped renting the house out in Sep 2010 and tried to sell but didn't do so until March 2011.

In 2011, I did not collect any rental income but the home was used by friends and family who crashed there for a total of about 3 weeks. I will not be filing Schedule E and will be claiming the mortgage interest and property tax deductions on Schedule A.

My question mainly has to do with whether or not I have to fill out form 4797, since in the year the house was sold, it was not held out for rent and I had personal use of it, although it was not my primary home.

A second question is that I want to verify that my "allowable" depreciation for 2011 schedule D purporses is the exact amount of the depreciation I took in 2008 - 2010 as limited by Sec. 280A. i.e. for amounts I couldn't take then, I don't get to take all depreciation in 2011 like I would under the passive activity loss rules and then account for the entire amount as unrecaptured gain.

“My question mainly has to do with whether or not I have to fill out form 4797, since in the year the house was sold, it was not held out for rent and I had personal use of it, although it was not my primary home.”--->I guess you do NOT need to file Form 4797, but you need to file Form 8949/Sch D of 1040 to report LTCG/LTCL on your 1040 and need to file unrecap depre worjsheet to recaspture your unrecap depre on the sale of the home; as you said, you lived in your home as a primary residence more than two years( for 8.2 years in your case from Apr 2003- Jun. 2008), but decided to move out and turned the property into rental housing in 2008. If you sell the property LESS than three years after you moved out, (before Jan. 2012, I guess)you still qualify for that primary residence exemption of $250,000 or $500,000. So if your gain (profit) is less than those thresholds, $250K, you will have no tax to pay on your gain, though you will have to pay depreciation recapture tax on the amount that you depreciated the property while it was a rental. Any depreciation allowed or allowable during the period that it was rented out is recaptured at sale time and is taxable at a higher rate than normal long-term capital gains, currently up to 25%.In order to survive an IRS audit on the sale if a partial exclusion on any gain is being claimed you will need a professional appraisal of the value of the property as of the date that it's converted to rental use. This is even more important today with the fluctuation in property values over the past few years. Any gain/loss in value going forward once it's converted to rental is treated separately from any exclusion of gain on the sale of a personal residence. Also bear in mind that once it's no longer been your principal residence for 3 years and one day, the exclusion of the gain on the sale of a personal residence is lost entirely. You still have to account for the gains separately (principal residence vs rental) since if there is a loss in value in the property once it's converted to rental that loss CAN be used to offset any other taxable gains(then you need to file Form 4797 to report the sale of rental pty). You still have the depreciation recapture to contend with as well and that's addressed as a separate item on Form 4797 when the property is sold.
“A second question is that I want to verify that my "allowable" depreciation for 2011 schedule D purporses is the exact amount of the depreciation I took in 2008 - 2010 as limited by Sec. 280A. i.e. for amounts I couldn't take then, I don't get to take all depreciation in 2011 like I would under the passive activity loss rules and then account for the entire amount as unrecaptured gain.”---> When a depreciable asset is sold, the depreciation that has been allowed or allowable is subject to recapture. When depreciation is recaptured, a portion of the gain on the sale is taxed at ordinary income tax rates instead of the more favorable capital gain rates. When a rental property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax on your return,OK??Even NOL/CL c/f can reduce unrecap deprte amount.

great site....

My question also involves a former rental unit that was converted to a primary residence which is now in the process of being sold.

FACTS:
-Rental home bought in 1979 for $250,000.
-Converted to primary residence in 2000 until present, unmarried taxpayer.
-Selling price is $1,250,000.
-recent improvements total $50,000.

My understanding is taxpayer qualifies for the $250k gain exclusion on primary home since he lived in house for past five years and the improvements cost is added to the unadjusted basis of 250k, bringing the basis to 300k before reducing basis for the former depreciation.

Question involves the depreciation recapture from 1979-2000 and we are confused as to whether the amount of depreciation will be taxed at the 25% rate instead of the 15% LTCG rate or whether that depreciation will be taxed at ordinary income rates. Is this all considered section 1250 depreciation unrecapture? this is where we get confused...thanks in advance

“-Rental home bought in 1979 for $250,000.-Converted to primary residence in 2000 until present, unmarried taxpayer.-Selling price is $1,250,000.-recent improvements total $50,000.”---->Your adj basis is $300K($250K+$50K) minus accumulated depreciation expenses. For example, assume that the accumulated depre expenses is $60K, thenyour adj basis is $240K;$300K minus $60K, and your SP is $1,250K, your LTCG is $1010K; $1,250K minus $240K.You need to recapture $60K as unrecap real estate depreciation. Unrecap real estae depre , as ordinary income, NOT LTCG, is subject to special 25% ta xrate. A special 25% tax rate applies to real pty gains attributable to depre previously taken and NOT already recaptured under sec 1245 or sec 1250 rules. So,any remaining gain, in this particular case, $60K, taken , including S/L depre, is taxed at 25% rather than LTCG rate of 0% or 15%, depending on yur marginal tax rate. As long as your ordinary tax rate, marginal tax rate, is 10% or 15%, the depre recapture will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 15% bracket and then at 25 %. If your marginal tax rate is higher than 15% then your depre recap is taxed at 25%.

“My understanding is taxpayer qualifies for the $250k gain exclusion on primary home since he lived in house for past five years and the improvements cost is added to the unadjusted basis of 250k, bringing the basis to 300k before reducing basis for the former depreciation.”--->In your case assume that your tax bracket is higher than 15%, then you need to pay tax on your recap depre, $60K, at 25% and subtract $250K form the remaining LTCG, $ 950K;$1,010K-$60K. You ned to subtract $250K form $950K, and $700K is subject to LTCG. In 2008–2012, the tax rate on long term capital gains is 0% for those in the 10% and 15% income tax brackets.If your marginal tax rate is higher than 15% , then you need to pay tax 15% on your LTCG of $700K. After 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

“Question involves the depreciation recapture from 1979-2000 and we are confused as to whether the amount of depreciation will be taxed at the 25% rate instead of the 15% LTCG rate or whether that depreciation will be taxed at ordinary income rates.”----->As described above.


“ Is this all considered section 1250 depreciation unrecapture? this is where we get confused.”----->As said above, only the recap depre, $60K can be subject to 25% special tax rate. The recap depre is NEITHER sec 1245 NOR sec 1250 expense