How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lev Your Own Question
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29535
Experience:  Taxes, Immigration, Labor Relations
870116
Type Your Tax Question Here...
Lev is online now
A new question is answered every 9 seconds

I read that if you sell a rental property you owned years

Customer Question

I read that if you sell a rental property you owned for 16 years and 10 months that you used for Section 8, you do not have to pay capital gains. I sold a rental property in 2014 and cannot find on Form 4797 or anywhere else, a place to exclude the gain. Also, is it possible to avoid the depreciation recapture? If I could do this, I would not have any capital gain. I owned this property almost 30 years and have 1099s from VHDA to prove I rented to Section 8 person. Thank you. I have a extension that just expired Oct 15. I thought we did not owe any tax, but in reviewing the return before filing, I discovered an error, that I had not reported the gain taken. When I put it in on Form 4797 I now owe tax. Thank you. I have searched the IRS Code and cannot find anything about the Section 8 or Low Income exemption, other than the 1% per month deduction after 100 months. I didn't understand that. 1 % of what? Susan R
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Can you verify what depreciation method was used for that property?

Customer: replied 1 year ago.
Hi! Sorry I am been away from the computer. I checked and on the Asset Entry worksheet it says Line 45 Depreciation Type: ACRS; Line 46 Asset class: 19; Line 47 Depreciation Method: PRE; Line 48 MACRS convention: NA; Line 50 Recovery Period: 19; Line 51 Year of depreciation 30. Line 52 Depreciable basis $31,875. AMT depreciation method: SL AMT Recovery period: 19.0 AMT depreciable basis $31,875. Our capital gains showing on the 1040 line 13 is $176,257.00
FYI this was originally set up by our CPA who retired and a subsequent CPA died. So I have been using Turbo Tax for the past years, but this is the first time I have sold a rental property. Actually there were 2 sales on 1 HUD to the same person, 2 duplex units for a gross sales price of $220,000. I paid $75,000 for them years ago. The capital gain on 1040 shows $176,257.00 I am a Real Estate Broker and the closing attorney should have allocated a portion of the price to real estate commission, but did not. This is important because I may want to sell another rental not used for Section 8 and/or my office building, but if I will use up all of my profit after paying off the mortgage, it may cost me to sell. In this case , the sale of the duplexes I had a mortgage on each that had to be repaid.
I have to leave now to go on a home visit (elder law) and to the Courthouse to try to straight out a title glitche in a closing set for tomorrow. I am also an attorney, but mostly retired and still do some elder law and home visits for elderly clients. And I have an appt to show some space in my office building this afternoon, so it will probably be after 5 before I can check my computer. I can try to check my smart phone. And I have a rehersal tonight at 7 pm. Would like to know your name.
Susan G. Moenssens (licensed in the state of VA as attorney and Real Estate Broker. AKA ***** ***** as I have remarried in 2013. Thank you again.
Expert:  Lev replied 1 year ago.

Hi Susan,

appreciate your reply.

.

Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families - are classified as Low-income housing that used to use a 15-year recovery period under ACRS.

According to IRS publication 534 page 4 -

https://www.irs.gov/pub/irs-pdf/p534.pdf

The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Use the percentages listed under that month for each year of the recovery period. Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987.

That is correct if the property was placed in service before 1987,

If the property was placed AFTER 1987 - we need to use 27.5 years recovery period.

Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommo-dations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis.

You posted - Recovery Period: 19 - so I would question that value.

see same publication

19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing

It looks - you might incorrectly used that Recovery Period.

.

Regarding depreciation recapture...

generally - there is no depreciation recapture on rental real property.

Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.

So - that additional depreciation which is subject to recapture is the depreciation you might claimed above the depreciation for the property using the straight line method.

If you simply used the straight line method - there is no any additional depreciation - and nothing to recapture.

.

see page 30

https://www.irs.gov/pub/irs-pdf/p544.pdf

Gain Treated as Ordinary Income. The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property...

then - see right column at the bottom

Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.

then we are looking on the next page Additional Depreciation...

If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method.

So - that additional depreciation which is subject to recapture is the depreciation you might claimed above the depreciation for the property using the straight line method.

If you were simply using the straight line method - there is no any additional depreciation - and nothing to recapture.

But if for some reasons you had ADDITIONAL depreciation - it will be recaptured.As we see - section 1250 assets are treated differently compare to section 1250 assets as that is related to depreciation recapture rules.

However - because you used incorrect recovery period - your basis must be calculated differently - and you might need to correct previous tax returns.

I hope that helps. Any Questions?

Customer: replied 1 year ago.
The date the properties were acquired was 7/1/1985 according to my records. There were already tenants so it was put it service at that time. My CPA chose the tax method of depreciation (He is retired.) I do not recall the date I first had Section 8 tenants. When you said there is generally n depreciation recapture on rental property, then why on line 22 of Form 4797, does it ask for the Depreciation allowed or allowable. I originally put 0 there, and we owed no tax. When I reviewed the form I thought it should be the depreciation taken over the years. When I put that in I show a gain of $90K plus. Can I put "0" on line 22? If not where can I subtract the depreciation so there is no depreciation recapture? Must run now to rehearsal for Christmas Chorale. Will check in AM, but have appts starting at 10 AM. Thanks for your help so far!
Expert:  Lev replied 1 year ago.

If the property was acquired on 7/1/1985 - that means - it has been owned more than 30 years - and would be FULLY depreciated if normal SL depreciation was used for 27.5 years.

So far - there is NO additional depreciation to be recaptured.

However - above you wrote - rental property you owned for 16 years and 10 months - that would be different issue - please verify if that correct.

But if indeed the property was placed in service on 7/1/1985 - your CPA correctly started with 19 year depreciation period.

Expert:  Lev replied 1 year ago.

Any way - if date 7/1/1985 is correct - the property is fully depreciated - and you will have full depreciated basis on line 22 form 4797.

Then - you will follow to the line 26 - and depreciation recapture should be zero.

Customer: replied 1 year ago.
Lev, here in the info I have copied and pasted stating there is no capital gain on sale of Section 8 rental property. So back to my original question: Unless I can put "0" in line 22 on Form 4797 (thereby leaving out the depreciation I have taken), I will still have a tax due. We have paid in, but unfortunately not enough, so I am looking for a loophole to eliminate tax due on the 1040.
My 1040 shows $176,257 on line 13 for capital gain. If there is no gain, then I am home free. **Also you asked about the 16 years 8 month, that is the time period established by the IRS for ownership of Section 8,or low income housing. The section says (and I will try to copy and paste the IRS section which I think I saved on my computer, below the blog saying there is no capital gain on section 8 rental property) IRS Code says ..."Low-income housing. (Bold type -can't use on your site) Low income housing includes all the followingtypes of residental rental property. ...
*Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8....."
"The applicable percentage for low-income housing is 100
% minus 1% for each full month the property was held over 100 full months. If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition."........
SO the QUESTION I HAVE HERE IS 1% OF WHAT? I have held the property almost 30 years, so my percentage would be ZERO, but PERCENTAGE OF WHAT? And here it uses the words, "no ordinary income will result from its disposition." I wanted to avoid Capital Gain. I know the tax is not the same. Perhaps the Blog was incorrect. I can't find it anywhere in the Code. Please comment. Below is the blog I copied. I will try to copy the IRS section for you also under the Blog.
ForumsTax, Legal Issues, Contracts, Self-Directed IRAIRS says: No Capital Gains Tax for You if you sell your section 8 rentals!
IRS says: No Capital Gains Tax for You if you sell your section 8 rentals! From Bigger Pockets.
5 posts by 2 users
Have a question or comment?
All of our members can post!
Login Here Create a Free Account
Val Csontos
Investor from Annapolis, Maryland
Jan 24, 09:46 AM
• 202 posts
• 107 votes
• 3 awards
There is a catch of course, but that is normal when dealing with the IRS. However if you have a long time Sec 8 rental, and you wouldn't mind to sell at ZERO Cap Rate this is your lucky day!!
Read the details on this directly from the quote below from the IRS publications:
Low-income housing. Low-income housing includes all the following types of residential rental property.
• Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws.
• Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed.
• Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families.
• Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949.
The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition***** *****
Investor from N Topsail Beach, North Carolina
Jan 26, 01:39 PMIRS SECTION I COPIED: Sorry it's so long. FYI - It wouldn't copy and paste. Don't see it
Ordinary or Capital Gain or Loss for Business Property. Must run. Have 10 AM appt. Will check back this afternoon.Topics - This chapter discusses:
Expert:  Lev replied 1 year ago.

The extract from IRS document is NOT related to exclusion from income tax - but it is related to exclusion from depreciation recapture which is taxed as ordinary income.
When you asked - is it possible to avoid the depreciation recapture?
The answer is - yes - because only the additional depreciation is subject to recapture for section 1250 assets

.

For low income housing - the additional depreciation is calculated differently - and that is an extract from page 31

https://www.irs.gov/pub/irs-pdf/p544.pdf

The applicable percentage for lowincome housing is 100% minus 1% for each full month the property was held over 100 full months. If you have held low income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition.

That means - no depreciation recapture.

The percentage is taken from depreciation basis.

But if you held the property more than 27.5 years - you woudl not have depreciation recapture anyway - and woudl not need to apply the low income housing exemption.

However - when you are asking "do I have to pay income tax on capital gains?" - the answer is - YES - when you realize the gain on the sale - that gain is included into your taxable income, but as long term capital gain taxed at reduced rate - not as ordinary income.

.

There is NO exclusion from taxable income just because the property was used for Section 8 housing.

There is no ordinary income (because there is no depreciation recapture) - that is correct - but still you will realize the capital gain.