Question 1

A taxpayer sells an office building (real property) for $500,000. Original cost was $400,000. Accumulated straight-line depreciation is $100,000. Adjusted basis is $300,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. What is the tax treatment of the $200,000 gain?

Accepted Answer

Real Property: 1. Gain up to Accum Depr = Unrecaptured §1250 (Max 25%). 2. Excess Gain = §1231 Capital Gain (Max 20%). Note: If accelerated depreciation was used, §1250 ordinary recapture might apply, but question specifies straight-line.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Treating real property depreciation as ordinary income (§1245 style); applying 20% rate to the whole gain.

A taxpayer sells an office building (real property) for $500,000. Original cost was $400,000. Accumulated straight-line depreciation is $100,000. Adjusted basis is $300,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. What is the tax treatment of the $200,000 gain?

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