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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 12177
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have an installment sale on a depreciated property, I am

Resolved Question:

I have an installment sale on a depreciated property, I am only getting 15k
Down payment and the rest is installment - will I be taxed for the entire
80k depreciation this year? Or over the installment period?
Submitted: 4 years ago.
Category: Tax
Expert:  Lane replied 4 years ago.

NPVAdvisor :


NPVAdvisor :

The installment method will allow the gain to be apportioned over the payments (recapture, and any other gain)

NPVAdvisor :

... excellent strategy for depreciated property

NPVAdvisor :

Hang on a sec... let me look at something ... may not be that simple .. my apologies, JUST a sec I'm looking at IRS regs right now

NPVAdvisor :

Sorry, don't shoot the messenger here .....

NPVAdvisor :

Depreciation recapture accelerates the recognition of gain when there is an installment
sale of depreciated property. When an installment sale occurs, the gain is reported over
the period of time during which the payments are received, but the total amount of any
depreciation recapture is fully recognized in the year of the sale even if no payments
towards principal are received that year.

NPVAdvisor :

Here's the IRS guidance:

Installment Sales

If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. This applies even if no payments are received in that year. If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale.

If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain.

NPVAdvisor :

Do not this portion: If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method.

NPVAdvisor :

BUt, with a small downpayment, so sorry, the opposite my knee-jerk reaction is actually true ... must be paid in year of sale

NPVAdvisor :

Again, apologize for the initial mis-step ... was thinking of the gain itself

NPVAdvisor :

THis one's pretty cut and dry

NPVAdvisor :

I gave you the IRS guidance ... and here's a good readable piece:

Depreciation Recapture - 101 - Cost Seg

NPVAdvisor :

Hope this help

NPVAdvisor :


NPVAdvisor :

As an add-on:

NPVAdvisor :

There are two types of dispositions which may delay or limit the amount of depreciation
Tax-free carryovers2 where the transferor’s adjusted basis becomes the
transferee’s basis (such as a gifts or a Section 351 transfer to a controlled
corporation), and
• Tax-free rollovers where the property’s adjusted basis becomes the basis for the
replacement property acquired by the transferor (such as a like-kind exchange and
an involuntary conversion).
Therefore, when either of the above occurs, although depreciation recapture is not
required initially, it may be required on a subsequent disposition of the property. The
depreciation recapture requirement is actually transferred from one taxpayer to another.
It is important to note that transfers at death do not require depreciation recapture.

NPVAdvisor :

Let me know if you have questions

Customer: replied 4 years ago.
I'm not sure what live answer means
Expert:  Lane replied 4 years ago.
Hi Jennifer,

That was a chat mode, where we can converse in real-time ... but you can still ask questions until you're satisfied here in the "Q&A" mode

Let me know

Customer: replied 4 years ago.
My original basis is 150k we tried selling it over the years starting
at 400k -300k 228k and now are settling for 129k with 15k down
6% int 30 yr amort for 7 yrs.
Is there a clause for when we put the asset into place as a FAir
Market Value? It was at least 300k at the time.
Customer: replied 4 years ago.
I'm wondering if I should back
Out of the deal and do a lease with option to buy or land contract?
We are still
In escrow.
What are your suggestions?

Many Thanks!
Expert:  Lane replied 4 years ago.

Step 1
If the property was purchased as a rental property, the fair market value is the value of the property on the purchase date. If the property was converted from personal use to a rental property, fair market value is the value of the property on the date of conversion.

Step 2
Determine the adjusted basis of the rental property. The adjusted basis is the cost of the building plus any permanent improvements or other capital costs minus the value of the land.

Compare the fair market value figure from Step 1 by the adjusted basis of the property from Step 2. The lower of the two amounts is your tax basis for the rental property.

Here's an excellent article:

(just saw your last post ... be right back)
Expert:  Lane replied 4 years ago.

Sorry, looks like our posts "crossed in the mail"

Once you run the numbers (given the amount of recapture here), I bet the lease with option (do it as two separate contracts) a lease contract and an option to buy contract .. will certainly defer things and let the market firm up a bit... and if the renter doesn't exercise the option to buy... Maybe you think about a 1031 exchange.

But it you have a renter .. just generally speaking, I don't think I'd manifest all that recapture right now, given that we may see things begin to fir up over the next several years.

Very regional, of course

Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 4 years ago.

Thanks Jennifer,

Good luck with it.

If you'd like to work specifically with ME again here, just say "For Lane only," at the beginning of y next question.

Thanks again,