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It doesn’t sound like you did your return right. The sale of a rental property at a gain should be reported on Form 4797 part 3.
There are two elements to the gain. Part of the gain is considered recapture of depreciation that was allowed or allowable. Depreciation on residential rental property placed in service after 1986 is computed on the straight-line basis over 27½ years. This works out to 3.636 percent of the cost per year.
Whether you deducted this amount every year or not, you must compute the depreciation that was allowed or should have been allowed and enter it on line 22 of Form 4797. Depreciation recapture is taxed at 25 percent and is carried over to Schedule D line 19 and the work sheets in the instructions to Schedule D. The work sheet is labeled “Unrecaptured Section 1250 Gain” and is on Page 8 of the instructions. This is followed by the tax computation work sheet. I highly recommend not trying to complete these forms without the assistance of a powerful computer.
The second element of the gain is the amount you realized in excess of the property’s original cost. If you held the property for more than one year, this is considered long-term capital gain, and the maximum tax that applies is 15 percent.
If you paid $40,000 on $100,000 in gain, you’ve overpaid. I suggest you see a tax professional that can help you amend the return and get a refund of any overpaid tax. You don’t have to hurry, because you have three years from the date you filed the original return to claim a refund. The good news is that IRS will pay you interest on any overpaid tax.
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