A taxpayer sells a business truck (Section 1245 property) for $30,000. Original cost was $50,000. Accumulated depreciation was $35,000. Adjusted basis was $15,000. What is the character of the gain?

Q: What mistakes do candidates make on this CPA question?

Treating it as 1231 capital gain.

Answer options:

$15,000 Section 1231 Gain

$15,000 Capital Gain

$15,000 Ordinary Income

$5,000 Ordinary; $10,000 1231 Gain

How to approach this question

Gain = $30k - $15k = $15k. Recapture limit = Accum Depr ($35k). Since Gain < Accum Depr, all gain is Ordinary.

Full Answer

C.$15,000 Ordinary Income✓ Correct

IRC §1245. Gain recognized = $15,000. Since this is less than the accumulated depreciation ($35,000), the entire gain is recaptured as ordinary income.

Common mistakes

Treating it as 1231 capital gain.

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