Real Estate Flashcards
What is the special passive loss rule for rental activity
Up to $25,000 in passive losses from real estate can be deducted each year against non passive income. The taxpayer must
actively participate (must own at least 10% & substantial involvement in managing property), The special allowance is reduced by 50% of the amount by which TP modified AGI exceeds $100,00, thus allowance is reduce to zero when modified AGI reaches 150,000. The phaseout is computed and reported on Part ll of Form 8582
Can a taxpayer filing Married Filing Separate deduct rental losses?
If you are married and file separate returns, you have a rental loss limit of up to $12,500, provided you lived apart from your spouse at all times during the tax year.
If you file married separate and you two lived together for ANY part of the year, you lose the right to deduct ANY rental real estate loss.
f you do not claim depreciation, then, when you sell, you must reduce your basis by any amount of depreciation you took or COULD HAVE TAKEN, so not taking the expense means you lose a chunk of loss carryover and still have to claim the depreciation amount when you sell.
Sources:
Google Search / thebalance.com / Intuit
7-8-22
How is the gain on the sale of a rental property taxed?
A. Capital Gains Rate
B. Ordinary Income Rate
C. Both Capital Gains Rate & Ordinary Income
D. Neither Capital Gains Rare or Ordinary Income Rate
C is the best answer, both capital gains rate and ordinary income rate.
How are the gains or loss on sale of rental property calculated?
The gain or loss on sale of a rental property (or other business asset) is:
Sales Price
Less adjusted basis of property sold
On sale of rental property where you have a gain, how is the tax calculated
You must split the gain into two parts
Part l
Is the amount of of depreciation taken which is called unrecaptured, Section 1250 gain and is taxed at TP ordinary marginal income tax rate or 25% whichever is lower
Part ll
The remaining gain is taxed at capital gains rate and the rate can vary depending on TP other income.
How is the sale or rental property reported on a person’s tax return
The sale is reported on Part lll of form 4797.
The gain also flows to Schedule D
The tax itself is calculated on a two page worksheet which if applicable breaks the tax calculation into ordinary income tax for depreciation recapture and into capital gains tax rate for remaining gain.
What tax do you pay on the sale of depreciated Real Estate
After computing the gain by subtracting the cost less depreciation from the net sales price you will have to split that gain into ordinary income and LT Capital gain. There are 3 types of depreciation recapture. There is Section 1245, Section 1250 and Unrecaptured Section 1250 gain. Unrecaptured Section 1250 gain is the recapture on the building depreciation. It is recaptured at a maximum rate of 25%. Today’s LT maximum capital gains tax rate is 20%. Additionally taxpayer may be subject to Net Investment Income Tax of 3.8% if modified AGI high.
YTV: How to Calculate Taxable Gain from Selling a
rental
Tax Smart Daily 020
How do you find out if you have suspended losses and what they are?
Review form 8582. This form shows you losses and income from all your passive activities. The form show rental real estate activities and all other passive activities. Always review prior year unhallowed losses. This is on line 1c and 3c. You can net passive losses from net income - all passive activities For greater detail on worksheets, especially worksheet 6
When can you and can’t you deduct rental losses
In general IRS considers rental activities to be a passive activity. Other passive income can come from partnerships or S-Corp you do not materially participate in. When it comes to rental activities there are two exceptions to the rule that passive income can only offset passive income s
1. Up to 25k or rental losses can be used to offset
other income if you “actively” participate in rental
Subject to phaseouts & filing status
2. An unlimited amount of rental losses can be used
to offset other income if you are a R.E prof and
materially participate in the activity
Active participation: Make management decisions
R.E Professionals must spend al least half of your working time materially participating in real property trades of business and this material participation must exceed 750 hours per year. There are seven different factors to determine material participation
RE Professionals - can qualify for QBI and is not subject to self employment tax
Ref: The Tax Geek
Rental Loss Limitations
What is section 1231 property
Source: ChatGPT
Section 1231 assets are generally held for business or investment purposes. Section 1231 property include”
1. Real property used in a trade or business, such as buildings, land, and rental properties.
2. Depreciable personal property used in a trade or business, such as machinery, equipment, and vehicles.
3. Timber, coal, held for sale or used in a trade or business.
The tax treatment of Section 1231 property is advantageous because it allows for the netting of gains and losses. When you sell a Section 1231 asset, any resulting gain is treated as long-term capital gain. Conversely, if you sell a Section 1231 asset at a loss, the loss is treated as an ordinary loss, which can be fully deducted against other income
It is important to be aware of the recapture rules. If you’ve previously claimed depreciation on the Section 1231 property, any gain attributable to the depreciation may be treated as ordinary income and subject to recapture.
What is section 1245 property?
ChatGPT
n general, Section 1245 property includes tangible or intangible personal property that is subject to depreciation and has been used for business or income-producing purposes. Examples of Section 1245 property can include machinery, equipment, furniture, vehicles, patents, copyrights, and other depreciable assets used in a trade or business.
When a taxpayer sells or disposes of Section 1245 property at a gain, a portion of that gain is treated as ordinary income and is subject to recapture of previously claimed depreciation. This means that the depreciation deductions taken on the asset during its ownership will be “recaptured” and taxed at ordinary income tax rates rather than the lower capital gains tax rates that typically apply to long-term capital gains.
What is section 1250 property?
Source: Google
Section 1250 addresses the taxing of gains from the sale of depreciable real property, such as commercial buildings, warehouses, barns, rental properties, and their structural components at an ordinary tax rate. However, tangible and intangible personal properties and land acreage do not fall under this tax regulation.. The most common examples of section 1250 property are commercial buildings (MACRS 39-year real property) and residential rental property (MACRS 27.5-year residential rental property).
What is section 1252 property?
26 U.S. Code § 1252 - Gain from disposition of farm land
What are some examples of section 1254 property?
26 U.S. Code § 1254 - Gain from disposition of interest in oil, gas, geothermal, or other mineral properties. the adjusted basis of such property, shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle
Section 1254 property includes intangible drilling and development costs, exploration costs, and costs for developing mining operations.
What is section 1255 property?
Chat 3.5 8-12-23 search
Section 1255 of the United States Internal Revenue Code pertains to the treatment of certain depreciable properties upon their disposition. Specifically, Section 1255 addresses the recapture of certain types of depreciation deductions that were previously claimed for property that is later sold or otherwise disposed of.
Under Section 1255, if a taxpayer sells or exchanges property and has claimed certain types of accelerated depreciation deductions (such as those allowed under Section 1245 or Section 1250) in prior years, any gain recognized from the sale is treated as ordinary income to the extent of those prior depreciation deductions. This “recaptured” ordinary income is taxed at ordinary income tax rates rather than capital gains tax rates.
