Taxation of the sales of real property after the TRA '97.

• Author: Sobol, Horacio
• Position: Taxpayer Relief Act of 1997 - Brief Article

The Taxpayer Relief Act of 1997 (TPA '97) modified the tax treatment of sales of depreciable real property.

Post-1986 Real Property

In general, to the extent the property being sold is real property placed in service after 1986, any previous depreciation reflected in the gain will be taxed at 25%. This result occurs since post-1986 real property must be depreciated using the straight-line method.

It is possible, however, to have the basis of real property reduced more rapidly. For example, basis may be reduced under Sec. 1017 on relief from qualified real property indebtedness. If the basis of property is reduced under this provision, such a reduction is treated as depreciation. In this instance, it is unclear what rate should apply.

Nonresidential Real Property Placed in Service 1981-1986

Nonresidential real property placed in service after 1980 and before 1987, for which an election to calculate depreciation under the straight-line method had not been made, is Sec. 1245 property. Any gain with respect to previous depreciation will be taxed at ordinary income rates. Most taxpayers had been advised to make the straight-line election to avoid ordinary income recapture on future dispositions.

Residential Real Property Placed in Service Between 1981-1986 and Pre-1981 Real Property

Care must be taken when calculating the tax effect of residential real property placed in service after 1980 and before 1987, and all other real property placed in service prior to...