Tax Advisor’s – Please Help Answer Tax Question Of The Week!

Tax Advisor’s – Your Thoughts On This Question Of The Week?

Could long term capital carryover loss eliminate or reduce depreciation recapture?
Sold during 2017 strip mall in 50% partnership after holding for 15 years.
Currently up against 4/17/2018 dead line with following tax issue.

– Before sale, asked CPA who has been doing taxes for this property for all these years, to crunch
numbers. He assured that the gain from sale would be offset by carryover loss and there would be
no tax consequences. With this assurance moved forward and closed the sale.
– Now after sale, while preparing tax return, his calculations took 180 degree turn. He says there is
no depreciation recapture, no capital gain, gain is just ordinary taxable income which does not
qualify for carryover loss except $3000. Now the tax liability is about $140K.
– Had I known above, would not have sold the property, would have held it as usual or sought 1031

– Before confronting him, need to have second expert opinion of truth of the situation – what is the correct – first calculation or second.

After sale calculations: At partnership level – Form 1065 -> Form 4797 / Part III / section 1245
Gross sale = $4,660K ===> line 20
Cost/Basis = $5,760K ===> line 21 ==> 4,800(PP) + 660(closing) + 300(improvement)
Depreciation = $2,300K ===> line 22
Adjusted/Book = $3,460K ===> line 23 ==> 5,760K(basis) – 2,300K(depreciation)
Total Gain = $1,200K ===> line 24 ==> 4,660K(gross sale) – 3,460K(Adjusted/Book)
Dep. Allowed = $2,300K ===> line 25a

Dep. Recapture = $1,200K ===> line 25b ==> smaller of line 24 or 25a

– there is depreciation recapture of $1,200K for partnership since total gain is lower than depreciation

Critical Question:
– This partner has long term capital carryover loss of $550K in 2017 .
– Could this partner reduce his share of depreciation recapture to $50K ($1,200K/2 – $550K) and

pay taxes on $50K in Form 1040 /Schedule D?

Desperately waiting to hear expert tax opinion.

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6 comments on “Tax Advisor’s – Please Help Answer Tax Question Of The Week!

  • Unfortunately, capital losses cannot be offset against depreciation recapture, period. However, if the depreciation claimed on the property was only straight line depreciation of real property, the the recapture income should qualify as Section 1250 recapture which is afforded a lower tax rate of 25%.

  • From TaxConnections Member
    First, the capital loss carryover reduces current year net capital gain. The excess reduces ordinary income up to $3,000. Since depreciation recapture is ordinary income the capital gain would indirectly reduce that.

  • Depreciation recapture is ordinary income. Long-term (or short-term) capital losses may not be offset against ordinary income.

    If the property is real estate (building) as opposed to personal property (machinery and equipment, furniture and fixtures), only the excess of Accelerated Depreciation over Straight Line is depreciation recapture. The remainder, if any is capital gain and would be subject to the offset.

    I haven’t researched the question recently, but that is my recollection from my 30 years of practice.

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