Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 2001 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

Question

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We first need to calculate the adjusted basis of the building:
Cost basis: $1.4 million
Accumulated depreciation: $538,000
Adjusted basis: $862,000 ($1.4 million - $538,000)

The gain recognized on the sale is the selling price minus the adjusted basis:
Gain recognized: $638,000 ($1.5 million - $862,000)

Since the building was used in a corporate business, the gain is classified as Section 1231 property.

To determine how much of the gain is ordinary versus Section 1231, we need to look at the netting rules. In general, gains and losses from the sale of Section 1231 property are netted together to determine whether there is a net gain or loss for the year. If there is a net gain, it is treated as Section 1231 gain. If there is a net loss, it is treated as an ordinary loss.

In this case, we don't have any losses to net against the gain, so the entire $638,000 gain will be treated as Section 1231 gain.

However, we still need to calculate the breakdown of the gain between ordinary and Section 1231. If the building had been held for more than one year (which it has), the maximum amount of gain that can be treated as ordinary is the amount of depreciation previously claimed on the building. In this case, Kuong has claimed $538,000 of MACRS depreciation, so the maximum amount of gain that can be treated as ordinary is $538,000.

The remaining gain of $100,000 ($638,000 - $538,000) will be treated as Section 1231 gain.

Therefore, the best choice is B: $107,600 ordinary gain and $530,400 Section 1231 gain.

Kuong Inc Sold a Commercial Office Building Used in the Corporate