Question

Jennifer Judd gives her son, Jim, Section 1245 property. The property has an adjusted basis of $11,000 to Jennifer, who has taken $2,000 in depreciation expense. Jim uses the property for three years, takes depreciation of $3,000 and then sells it for $14,000. What amount of gain must Jennifer recognize and what amount of gain must Jim recognize?

		$2,000 Section 1231 gain; $3,000 Section 1231 gain
		$0; $5,000 ordinary income and $1,000 Section 1231 gain
		$2,000 ordinary income; $6,000 Section 1231 gain
		$0; $3,000 ordinary income and $3,000 Section 1231 gain

Answer 1

Section 1245 property has depreciation recapture provision applicable so if sec 1245 property is sold at gain then gain is first classified as depreciation recapture to the extent of depreciation taken and taxed as ordinary income and if still any balance gain then its classified as section 1231 gain. In this case total depreciation taken is 3000+2000 = 5000 , so ordinary income of $5000 is recognized and $1000 is sec 1231 gain.

Basis in hands of Jennifer 11000

Add depreciation taken = 2000

Original cost of property = 13000

So 14000-13000 = 1000 sec 1231 gain

And basis in hands of jim 11000 and depreciation taken 3000 adjusted basis = 8000 and sold for 14000 so total income is 14000-8000 = 6000 out of which 1000 is sec 1231 and balance ordinary income.

Choice B