Form 4797Chapter 3 pp. 85 -118
2018 Agricultural Tax Issues
Form 4797Page 85
Reporting of gains and losses on the disposition of business property. The collection point for gains and losses
reported elsewhere.
Overview of Key Terms Page 85
Boot Deferred Gain I.R.C. § 1231 Property I.R.C. § 1245 Property I.R.C. § 1250 Property Listed Property
Realized Gain Recognized Gain Relinquished Property Replacement Property
I.R.C. § 1231 Property Page 86
Net gain taxed as capital gain Net loss as ordinary loss List of 8 itemsGenerally, sales & exchanges of
business property Includes livestock if held for dairy,
breeding, sport or draft
Holding Periods andReporting Page 87
Cross-Reference between Forms 4797 and Form 4684, Section B (See Chapter 4) I.R.C. § 1231 requires a holding period for
business assetsGenerally held for more than one year 24 months for cattle and horses 12 months for other livestock
G/L reported on Form 4797, Part 1 Example 3.1
Example 3.1 Form 4797 reporting
Form 4797, Part II
Part II is the collection point for transaction which do not qualify under I.R.C. §1231.Ordinary Income and losses Example 3.2
Sale of Joseph’s land before 11-15-18.Practitioner Note: De Minimis Election
Other I.R.C. § 1231 Issues to considerPage 89
Excluded Property List of 4 items – inventory, self-created capital
assets Excluded Gain I.R.C.§ 1239 Sale of property to related party who can
depreciate it Know your relatives – only 3 in this casePractitioner Note: I.R.C.§ 197 Intangibles
Nonrecaptured I.R.C. § 1231 LossesPage 90
Losses and gains in the same year are netted on Form 4797. Any net I.R.C. § 1231 gain in any of 5 years following
a net I.R.C. § 1231 loss is treated as ordinary income to the extent of any of that prior
nonrecaptured I.R.C. § 1231 loss.
Example 3.3 Recapture of I.R.C. § 1231 Losses Page 90
Year Gain Loss Capital
Gain Ordinary Income
Ordinary Loss
Nonrecaptured § 1231 Loss Carryover
2012 $16,000 -- $16,000 -- -- -- 2013 $ 7,000 -- $ 7,000 -- -- -- 2014 -- $15,000 -- -- $15,000 $15,000 2015 $ 5,000 -- -- $ 5,000 -- $10,000 2016 $ 4,000 -- -- $ 4,000 -- $ 6,000 2017 $ 2,000 -- -- $ 2,000 -- $ 4,000 2018 $ 6,000 -- $ 2,000 $ 4,000 -- $0
Example 3.3 Form 4797
Planning Pointersp. 92
If possible, generate § 1231 gains first, then losses in subsequent tax year If § 1231 gains, are infrequent, accelerate
any loss to start the 5-year recapture period
Depreciation Recapture Page 92
This section focuses on I.R.C. § 1245 or 1250 property dispositions at a gain § 1245 - All gain is taxed as ordinary income up
to the total allowed or allowable depreciation § 1250 - All gain is taxed as ordinary income up
to the excess of depreciation in excess of S/L Similar ordinary income may arise due to
I.R.C. §§ 1252, 1254, and 1255
Form 4797, Part III
Part III is the initial entry for those transaction which are subject to recapture rules. Held the required holding period Sold at a gain
Each property disposed of has a unique column for reporting the
transaction. and a unique row depending on recapture
rule
I.R.C. § 1245 Depreciation RecapturePage 93
Ordinary income to the extent that the lower of1. Recomputed basis, or2. Amount realizedExceeds adjusted tax basis
Or, gain is ordinary to the extent of depreciation (and other deducts – see list of 18)
I.R.C. § 1245 Depreciation RecapturePage 93
Definition of I.R.C. § 1245 Property List of applicable property depreciable personal property, SP
livestock/hort. bldgs, grain bins, silos, etc.
I.R.C. § 1245 Depreciation RecapturePage 93
Recomputed Basis Recomputed Basis is adjusted basis plus
the adjustments made for depreciation, amortization and other deductionsGenerally, original cost
Example 3.4 Recapture
Page 94
Sandy Pitt purchased a $120,000 loader in 2016 Elected out of Bonus Chose $10,000 for I.R.C § 179 Remaining $110,000 MACRS, 5 year Sold in 2018 for $65,000
Realized Gain CalculationSelling price $65,000Cost $120,000I.R.C. § 179 election (10,000)Depreciable amount $110,000Depreciation 2016
$110,000 × 20.0% =$ 22,000
2017 $110,000 × 32.0% = 35,200
2018$110,000 × 19.2% × ½ =
10,560
Accumulated depreciation
(67,760)
Adjusted basis (42,240)Realized I.R.C. § 1245 gain
$22,760
Form 4797 Reporting of $22,760 Gain
I.R.C.§ 1250 Depreciation RecapturePage 95
Similar Rules as previously discussed, applies to depreciable real property However, single-purpose ag and hort structures,
etc are I.R.C § 1245 property by definition Gain in excess of straight-line depreciation is
taxed as ordinary. The gain equivalent to straight-line is
“unrecaptured I.R.C.§ 1250 gain” and is taxed at a maximum of 25% (could be less).
Example 3.5 Sale of MACRS Farm Building Page 96
Red bought a farm building 7/1/2008 $100,000 basis to the building $20,000 basis to the landMACRS, 150% DB, 20-year property SOLD for $138,000 7/2/2018
Depreciation Recapture Calculation
Year150% DB 20-Year
MACRS Rate
MACRS Depreciation
Amount
SL Depreciation Amount
2008 3.750% $ 3,750 $ 2,5002009 7.219% 7,219 5,0002010 6.677% 6,677 5,0002011 6.177% 6,177 5,0002012 5.713% 5,713 5,0002013 5.285% 5,285 5,0002014 4.888% 4,888 5,0002015 4.522% 4,522 5,0002016 4.462% 4,462 5,0002017 4.461% 4,461 5,0002018 4.462% × ½ 2,231 2,500
Total depreciation $ 55,385 $ 50,000
Realized Gain CalculationSelling price of the building $110,000Adjusted basis of the building ($100,000 – $55,385) (44,615)Realized gain on the sale of the building $ 65,385
Selling price of the land $28,000Adjusted basis of the land (20,000)Realized gain on the sale of the land 8,000Total realized gain on sale $73,385
I.R.C. § 1250 recapture as ordinary income $ 5,385
Unrecaptured I.R.C. § 1250 gain (maximum 25% rate)
50,000
I.R.C. § 1231 gain (maximum 20% rate) 10,000Total realized gain on the sale of the building $ 65,385
I.R.C. § 1231 gain (maximum 20% rate) $ 8,000Total realized gain on the sale of the land $ 8,000
Page 1, 4797 Reporting of the Sale
Page 2, 4797 Reporting of Sale
Like-kind Exchanges Page 99
Recapture Rules: apply if there is an exchange of property
that is not subject to the same recapture rules. cause recapture income to be recognized
at the time of the exchange.
Additional Information Page 100
Observation Real property with different recapture rules
Practitioner Note Involuntary Conversion
Law Change TCJA removed personal property from the
like-kind exchange rules.
Property Subject to the Same Recapture Rules Page 100
Example 3.6 Exchange of I.R.C.§ 1245 prop. Able Skeever traded land, each parcel had
a bunk silo which was I.R.C.§ 1245 property See Example fact pattern for details
Realized and Recognized Gains Fig. 3.9FMV of silo #2 $ 85,000
Cash received 5,000Amount realized $ 90,000
Cost of silo #1 $ 100,000
Depreciation 2016 $100,000 × 10.71% = $ 10,7102017 $100,000 × 19.13% = 19,1302018 $100,000 × 15.03% × ½ = 7,515
Accumulated depreciation ( 37,355)
Adjusted basis of silo #1 ( 62,645)
Realized I.R.C. § 1245 gain on exchange $ 27,355
Gain recognized (boot) ( 5,000)
Deferred I.R.C. § 1245 recapture
$ 22,355
Form 8824 for Example 3.6 Fig. 3.10
Form 8824 for Example 3.6 Fig. 3.10
Form 8824 for Example 3.6 Fig. 3.11
Recognized Gain Calculation of Silo #2Sale price of silo #2 $ 90,000Basis of silo #2 $ 62,645Depreciation* 2018 $100,000 × 15.03% × ½ = 7,515
2019 $100,000 × 12.25% = 12,2502020 $100,000 × 12.25% × ½ = 6,125
Accumulated depreciation
(25,890)
Adjusted basis of silo #2 ( 36,755)
Gain realized and recognized $ 53,245Depreciation on silo #2 – I.R.C. § 1245 ordinary income
( 25,890)
Deferred recapture on silo #1 – I.R.C. § 1245 ordinary income
( 22,355)
I.R.C. § 1231 gain $ 5,000
Property Not Subject to Same Recapture Rules Page 104
Most buildings are I.R.C. § 1250 property However, sometimes gain is realized See list of non-§1250 real property Example 3.7 I.R.C. § 1245 Real Property
Facts illustrate building differences due to choices made relative to office bldg.
Summary of Like-Kind Exchange
Allocation of Relinquished Property to Acquired Property Fig. 3.14
Property Relinquished
Property Acquired
I.R.C. § 1231 I.R.C. § 1250
$100,000 of I.R.C. § 1231 property $75,000 $25,000
$400,000 of I.R.C. § 1245 property 400,000
$50,000 cash 50,000
Total $75,000 $475,000
Basis in Acquired Property
See Observation: Exchanges of single purpose livestock structures for other type buildings.
Installment Sales Page 107
The installment sale method applies to gains from nondealer sales of property where at least one payment is received in the tax year after the year of sale. Taxpayers must meet four criteria to
qualify. Easy to elect out (Practitioner Note)
Installment Sales Page 107
Taxable Gain Calculation Use IRS Form 6252Must report depreciation recapture in
year of saleOtherwise, gain or ordinary or capital
depending on type of asset and holding period Contract must charge adequate interest
Example 3.8 Seller financing Page 108
Machinery Sale on installment Sold machinery line for $320,000
• $100,000 down• $44,000 annually for 5 years• Plus interest
Orig. cost: $290K, $200K Adj. basis
Gross Profit % with Depreciation Recapture Addback
Page 108Selling price $ 320,000Adjusted basis ( 200,000)Gain $ 120,000
Selling price $ 320,000Adjusted basis $ 200,000Depreciation recapture 90,000Adjusted basis for gross profit calculation
( 290,000)
Gross profit $ 30,000
Gross profit $ 30,000Selling price ÷ 320,000Gross profit percentage 9.375%
Form 4797 Reporting Page 111
Form 4797 Reporting Page 110
Form 4797 Reporting Page 111
Form 6252 Result
Form 4797 Reporting Page 110
I.R.C. § 179 Recapture Page 113
If use drops below 50% for business, taxpayer must recapture the excess depreciation as compared to MACRS without using the expense election. Example 3.11 Winnie has 40% business use, $5,058
recapture as ordinary and SE tax too.
I.R.C. §179 Recapture Calculation
I.R.C. § 280 Listed Property RecapturePage 115
If listed business property use drops below 50%, then ADS straight-line depreciation is the depreciation allowable. Recapture of excess depreciation is
required from prior years.
Example 3.12 Depreciation Recapture under I.R.C. § 280F
Rita bought a car for $34,000 in 2016. Business use was 70%, basis $23,800 $10,000 expensed under §179
In 2018 use drops to 20% for business. Recapture of §179 amount and MACRS
depreciation
I.R.C. § 280F Recapture CalculationDepreciable Basis ×
MACRS RateDepreciation
AmountTotal
DepreciationActual depreciation:
I.R.C. § 179 $ 10,000
2016 MACRS $13,800 × 20.0% = 2,760
2017 MACRS $13,800 × 32.0% = 4,416
Total actual depreciation $ 17,176Allowable depreciation:
2016 ADS/SL $23,800 × 10.0% = $ 2,380
2017 ADS/SL $23,800 × 20.0% = 4,760
Total allowable depreciation ( 7,140)
I.R.C. § 280F recapture amount $ 10,036
Form 4797 Reporting
Questions?
Form 4797�Chapter 3 pp. 85 -118Form 4797� Page 85Overview of Key Terms Page 85I.R.C. § 1231 Property Page 86�Holding Periods and�Reporting Page 87Example 3.1 Form 4797 reportingForm 4797, Part IIOther I.R.C. § 1231 Issues to considerPage 89Nonrecaptured I.R.C. § 1231 Losses Page 90Example 3.3 Recapture of I.R.C. § 1231 LossesPage 90Example 3.3 Form 4797Planning Pointers�p. 92Depreciation RecapturePage 92Form 4797, Part IIII.R.C. § 1245 Depreciation RecapturePage 93I.R.C. § 1245 Depreciation RecapturePage 93I.R.C. § 1245 Depreciation RecapturePage 93Example 3.4 RecapturePage 94Realized Gain CalculationForm 4797 Reporting of $22,760 GainI.R.C.§ 1250 Depreciation Recapture�Page 95Example 3.5 Sale of MACRS Farm Building Page 96Depreciation Recapture CalculationRealized Gain CalculationPage 1, 4797 Reporting of the SalePage 2, 4797 Reporting of SaleLike-kind Exchanges Page 99Additional Information Page 100Property Subject to the �Same Recapture RulesPage 100Realized and Recognized Gains Fig. 3.9Form 8824 for Example 3.6Fig. 3.10Form 8824 for Example 3.6Fig. 3.10Form 8824 for Example 3.6Fig. 3.11Recognized Gain Calculation of Silo #2Property Not Subject to Same �Recapture RulesPage 104Summary of Like-Kind ExchangeAllocation of Relinquished Property to Acquired PropertyFig. 3.14Basis in Acquired PropertyInstallment SalesPage 107Installment SalesPage 107Example 3.8 Seller financing Page 108Gross Profit % with Depreciation Recapture Addback Page 108Form 4797 Reporting Page 111Form 4797 Reporting Page 110Form 4797 Reporting Page 111Form 6252 ResultForm 4797 Reporting Page 110I.R.C. § 179 Recapture Page 113 I.R.C. §179 Recapture CalculationI.R.C. § 280 Listed Property Recapture Page 115Example 3.12 Depreciation Recapture under I.R.C. § 280FI.R.C. § 280F Recapture CalculationForm 4797 ReportingQuestions?
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