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George Saenz, the Bankrate.com Tax Talk columnistReporting unrecaptured 1250 gain

Dear Tax Talk,
My sister received a K-1 report on her share of a partnership concerning renting and selling some houses. Her share of an unrecaptured 1250 gain was $5,000. I thought I had to include this on the capital gains sheet, but the local accountant said you do not need to include this as a gain. Is he correct?
-- L. Flowers

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Dear L. Flowers,
I am assuming you're doing your sister's return and not trying to put her income on your capital gains sheet, and that you need a local accountant and me to resolve this.

Unrecaptured Section 1250 gain is that portion of your overall gain attributable to straight-line depreciation allowances, on business or rental real estate. Unrecaptured Section 1250 gain is taxed at 25 percent, and the remainder of the gain is usually taxed at the preferential long-term, capital gains rate of 15 percent.

A Schedule K-1 is an informational schedule provided to members of a partnership, to include the partnership's items of income and loss on their respective tax returns. Partnership income is taxed to the partners, hence the need for an informational schedule, which is aptly named Schedule K-1.

Line 9c of Schedule K-1 includes that portion of the gain reported on line 10 that should be taxed at the 25 percent rate. Since the Line 9c amount is already included in the line 10 amount, you would not add the two together to report it on Form 4797 Line 2. Instead, you would report the Line 9c amount on Schedule D Line 19, after completing the unrecaptured Section 1250 worksheet that appears on Page D-8 of the Schedule D instructions. That amount would again figure into the return when you complete the Schedule D tax worksheet, on page D-9 of the Schedule D instructions.

If you're trying to do this by hand, I wish you all the luck in the world.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: March 17, 2006
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