Question

Karey bought a small shopping mall on July 15, Year 1, for a total price of...

Karey bought a small shopping mall on July 15, Year 1, for a total price of $2,340,000. Karey used straight-line depreciation and deduction $565,000 before the mall was sold for $2.5 million on December 31, Year 10. The gain on the sale should be reported as

A. $565,000 ordinary income and $160,000 Sec. 1231 gain.

B. $160,000 capital gain.

C. $725,000 Sec. 1231 gain.

D. $725,000 ordinary income

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Homework Answers

Answer #1

Cost price = $2,340,000

Depreciation = $565,000

Book value at the day of sale

= 2,340,000 - 565,000

= $1,775,000

Selling price = $2,500,000

Gain on sale of asset

= 2,500,000 - 1,775,000

= $725,000

Section 1231 deals with the gain on sale of capital asset which are held for more than 1 year. However ordinary Income include all the income except long term capital gain. So it will be reported under sec 1231.

Therefore the correct option is C.

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