Question

Brandon, an individual, began business four years ago as a sole proprietorship and has sold §1231 assets resulting in $6,000 of unrecaptured losses within the last 5 years. In the current year, Brandon sold the following business assets. All of these assets were placed in service more than one year ago.

Asset	Original Cost	Accumulated Depreciation	Gain/Loss
Machinery	$ 30,000	$ 7,000	$ 10,000
Land	$ 40,000	$ 0	($5,000)
Building	$ 90,000	$ 30,000	$20,000

Hint: This is not a corporation (so Sec. 291 will not apply). See pages 11-14 through 11-16 of the e-text (or textbook) to see how Sec. 1250 gains are taxed for individuals.

What is the amount of depreciation recapture on these sales?                            [ Select ]                       ["$14,000", "$16,000", "$7,000"]      

What is the character of the $25,000 net gain?

Answer 1

Depreciation recapture is applicable on gain on sale of machinery that is only section 1245 asset.

Depreciation recapture is lesser of gain ($10,000) and accumulated depreciation ($7,000). Depreciation recapture is $7,000.

Character of $25,000 gain:

$7,000 ordinary income (depreciation recapture on machinery)

$3,000 balance gain on sale of machinery is section 1231 gain ($10,000 - $7,000).

$6,000 ordinary income (section 1231 lookback rule)

$9,000 balance gain on sale of building is 1250 gain taxable at maximum rate of 25%.

Please rate.