A taxpayer sells a machine used in business for $50,000. The machine was purchased for $60,000 and has accumulated depreciation of $25,000. What is the amount and character of the gain or loss?

Answer options:

$15,000 §1231 Capital Gain

$10,000 Ordinary Loss

$15,000 Ordinary Income

$15,000 Capital Gain

How to approach this question

1. Calculate Gain. 2. Compare Gain to Accumulated Depreciation. 3. Lesser of Gain or Depreciation is Ordinary (§1245). 4. Excess is §1231.

Full Answer

C.$15,000 Ordinary Income✓ Correct

IRC §1245. Adjusted Basis = $35,000. Gain = $15,000. Accumulated Depreciation = $25,000. Since the gain is less than the depreciation taken, the entire $15,000 is recaptured as ordinary income.

Common mistakes

Treating it as §1231 gain; miscalculating basis.

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