Question

Taxpayer, Inc. (a C corporation) bought a building several years ago to use as a warehouse in its business. It paid $20,000 in cash and assumed a $180,000 debt from the seller in connection with the purchase. Over the years, Taxpayer (properly) deducted $30,000 in straight line depreciation from the date the property was purchased through the date of sale. Taxpayer sold the warehouse in the current year. The buyer paid Taxpayer $50,000 in cash, took the property subject to the $180,000 debt, and also provided moving services to Taxpayer worth $7,000.What portion of Taxpayer, Inc.’s recognized gain or loss on the sale of the warehouse will be ordinary?

Answer 1

Answer:

Portion of Taxpayer, Inc.’s recognized gain or loss on the sale of the warehouse will be ordinary = Recapture of depreciation = $30,000

Adjusted basis of building at the time sale = (Cash paid + Debt assumed) - Depreciation till date = $20,000 + $180,000 - $30,000 = $170,000

Sale value realized = $50,000 + $180,000 = $230,000

Amount paid for moving services to Taxpayer worth $7,000 is assumed to be reimbursement of actual moving expenses

Total gain = 230000 - 170000 =$60,000 out of which:

Ordinary gain = Recapture of depreciation = $30,000

Capital gain = 60000 - 30000 = $30,000