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On July 6, 1977, petitioners purchased a two-story
residential property (investment property) at 7708 Bay Parkway,
Brooklyn, New York. For approximately 20 years, petitioners
rented the two-family investment property to various tenants. In
addition, the testimony of Philip Skalka (petitioner) maintained
his dental office on the second floor. Petitioner testified that
he depreciated the investment property over a 20-year period.
On October 27, 1997, petitioners sold the investment
property for a gross sale price of $297,500. Petitioners
reported the property sale on Form 4797, Sale of Business
Property. On Form 4797, petitioners reported a cost or other
basis in the property of $85,611.69 and depreciation allowed or
allowable of $59,187.69. Accordingly, petitioners reported an
adjusted basis of $26,242, for a total gain from the sale of
$271,076. Petitioners further reported on Form 4797 that $32,029
of the total gain was from section 1250 property. Petitioners
subtracted the $32,029 of reported section 1250 gain from the
total gain amount to arrive at a capital gain of $239,047.
Petitioners included the $239,047 of capital gain as income on
their 1997 tax return. However, petitioners did not include the
$32,029 of section 1250 gain in income.
Using Schedule D, Capital Gains and Losses, petitioners
determined their 1997 Federal income tax using the maximum
capital gains rates. In the tax computation, petitioners
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