ExpertMedium1 markMultiple Choice
CPA · Question 62 · Area IV: Property Transactions
Taxpayer sells a machine used in business for $12,000. Original cost was $10,000. Accumulated depreciation was $6,000 (Adjusted Basis $4,000). What is the character of the gain?
Taxpayer sells a machine used in business for $12,000. Original cost was $10,000. Accumulated depreciation was $6,000 (Adjusted Basis $4,000). What is the character of the gain?
Answer options:
A.
$8,000 Capital Gain
B.
$6,000 Ordinary Income, $2,000 §1231 Gain
C.
$8,000 Ordinary Income
D.
$4,000 Ordinary Income, $4,000 §1231 Gain
How to approach this question
Total Gain = $12k - $4k = $8k. §1245 Recapture = Lesser of Gain ($8k) or Depreciation Taken ($6k) -> $6k Ordinary. Remaining Gain ($2k) is §1231.
Full Answer
B.$6,000 Ordinary Income, $2,000 §1231 Gain✓ Correct
IRC §1245. Depreciation recapture converts gain to ordinary income to the extent of depreciation allowed ($6,000). Any gain in excess of original cost ($12,000 - $10,000 = $2,000) is §1231 gain.
Common mistakes
Treating the entire gain as ordinary or capital.
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