Question

John Burtt sold his small office building for $290,000 in 2019. Burtt acquired the building in January 1986 for $270,000 and made improvements costing $15,000 at that time. John used accelerated deprecation under ACRS, and the asset was fully depreciated. For tax purposes Burtt should treat the gain as

Answer choices

1. $241,550 Sec. 1231 gain.

2. $5,000 Sec. 1231 gain; $225,000 ordinary income.

3. $5,000 Sec. 1231 gain; $285,000 ordinary income.

4. None $16,550 Sec. 1231 gain; $225,000 ordinary income. of the above

Answer 1

Answer : Option - 3,  $5,000 Sec. 1231 gain; $285,000 ordinary income.

Explanation : Section - 1231 states that when a depreciable or real property which is used in trade or business, is held for more than a year then the difference of cost and sale value is taxable as capital gain. So, difference of cost (i.e. $270,000 + $15,000) and sale value i.e. $290,000 is capital gain.

Also, the asset was fully depreciated, So the cost of asset is treated as ordinary income in the year of sale i.e 2019.