Question

A.) Jack sold a building (cost $4,900,000; accumulated depreciation $1,500,000) for $5,200,000. The building was placed in service in 2008. What is the amount of Sec. 1231 (25%)/Sec. 1231 (15%) gain, respectively?

1. $ 300,000/$1,500,000

2. $1,500,000/$ 300,000

3. $ 0/$1,800,000

4. None of the answers provided are correct.

5. $1,800,000/$ 0

B) Lemon Corporation purchased a building in 1980 for $1,200,000. During 2019, the building was sold for $820,000 when the accumulated depreciation was $700,000 (SL would have been $650,000). What is the amount of ordinary income/Sec. 1231 gain recognized on the sale?

1. $ 50,000/$270,000

2. None of the answers provided are correct?

3. $ 54,000/$266,000

4. $320,000/$ 0

5. $104,000/$216,000

Answer 1

Answer to A.

As per Section 1231 when business sold depreciable assets then gain will taxable at a lower rate and depreciation will be taxable at normal rate:

@ 25% = $1,500,000

@ 15% = $5,200,000 - ($4,900,000 - $1,500,000) - $1,500,000

= $300,000

Option 2. 1,500,000 / 300,000

Answer to B.

Current year deprecaition will be taken in ordinary Income

= Accumulated Depreciation - SL would have been

= $ 700,000 - $ 650,000

= $ 50,000

Section 1231 gain=

= Sale proceeds - Net assets Value

=$ 820,000 - ($1,200,000 - $ 650,000)

= $ 270,000

So option 1 is correct $50,000 / $270,000

Note: For net assets depreciation till last year taken & current year depreciation will be normal income