How to File IRS Form 4797 - Section 1250 Ordinary Recapture on Sale of Real Estate

Rental real estate (whether commercial or residential) is Section 1250 depreciable property and is eligible for depreciation expense under Section 168. If a rental property is sold, the Section 1250 rules for gains and losses may create a depreciation recapture amount for the seller.
There is a big difference between unrecaptured Section 1250 gain, and ordinary Section 1250 recapture.
Unrecaptured Section 1250 gain is the most common character of income, where the gain is treated as long-term capital gain, but subject to ordinary income tax rates, up to a maximum of 25%.
Ordinary Section 1250 recapture is ordinary income subject to ordinary income tax rates, up to the maximum marginal tax rates for individuals. Ordinary Section 1250 recapture only applies where the real estate was depreciated using an accelerated method above the straight-line depreciation.
In this example, we cover a fact pattern where an entity purchased a commercial property in 1981, applied the ACRS depreciation method from 1981 to 1986, then switched to straight-line depreciation for 1987 and going forward.
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[@snwiley76]

GREAT explanation, Jason! Very helpful. I sold my 40 year old rental residential property in September, which was fully depreciated using 15 year ACRS. The only difference from your example is that I stayed with the accelerated schedule the entire time, not switching to straight line depreciation. So, over the course of the 15 years of depreciation, I had additional depreciation in the first five years, but for the last 10 years my depreciation claimed was less than the SL amount, i.e. a negative difference. At the end of the 15 year period, the total depreciation claimed under both methods is the same. It seems to me that on my Form 4797, Part III, line 26a, the amount should be zero, because over the entirety of the life of the property, I had no additional depreciation than if I had used SL. If I need to account for the first five years of additional depreciation as you have shown, how should I account for the other 10 years where the claimed depreciation was less than the SL amount? Thank you for your easy to understand videos.

[@jeannettekelbaugh3216]

How are you calculating the land value at $325K. The % originally used at time of purchase doesn't calculate to the same % at time of sale. Did you use the appraisal from the sale?

[@JasonDKnott]

The percentage used at time of purchase would likely never be the same on the date of sale, as the FMV of the land, building and other assets would would change independently of each other. We recommend using an appraisal at time of sale. The appraisal should adequately separate the FMV of all relevant amounts (land, building, improvements, sec. 1245 personal property, etc.).

[@naveenchowdary23]

@@JasonDKnott Thanks for the clarification , even I had the same doubt.