Question

A taxpayer sold a residential rental building for a gain of $15,000. The building was purchased and placed in service in March 2012. (The sale of land is not included in this question.) No other property was sold during the current tax year. The depreciation allowed or allowable was $10,635. What is the amount and nature of the gain or loss? $4,365 gain taxed as a long-term capital gain and $10,635 gain taxed at a maximum of 25%. $4,365 gain taxed at a maximum of 25% and $10,635 gain taxed as a long-term capital gain. $15,000 gain taxed as a long-term capital gain. $15,000 gain taxed at a maximum of 25%..

Answer 1

Solution:

Option A is the correct answer i.e. $4,365 gain taxed as a long-term capital gain and $10,635 gain taxed at a maximum of 25%.

In this case, the depreciation recapture rule will apply. As depreciation taken was $10635 so up to this limit the gain will be treated as ordinary income and will be taxed at 25% rate. In this case, the gain is $15000 so it is outside the depreciation amount so $10635 will be taxed at 25% and the balance amount i.e. $15000 - $10635 = $4,365, this will be treated as gain taxed as a long-term capital gain