Question

digiserve inc. bought a customer service phone and computer system for 200,000. a couple of years later, after it had taken 110,000 in macrs deductions, it sold the system for 70,000 and replaced it with a more efficient and technological advanced system. if digiserve had no other section 1231 transactions in the year it sold the system, how is its 20,000 loss (90,000 adjusted basis less 70,000 sale price) treated?

A as a capital loss because cost recovery deductions taken on the equipment exceed the loss

B as a capital loss because the system was used in its business

C it is added to the basis of the replacement system

D as an ordinary loss because the system was section 1231 property

Answer 1

As per section 1231 transactions, if total gain is more than losses then the net gain will be Capital gain however if the amount of loss is greater then gain then the net loss will be treated as Ordinary loss.

In the following case the asset is sold at 20000 loss and there is no other transaction in the year therefore there is no question of arising of any gain which could exceed the loss of 20000, therefore the loss will be treated as ordinary loss because the system was section 1231 property.