Keiko sells a piece of equipment used in her business for $14,853 on August 10, 2015. The equipment was purchased on January 4, 2014 at a cost of $12,849. Keiko has taken $3,855 of depreciation on the equipment. What is the amount and classification of the gain on the sale by Keiko?

Question

Quizplus · Accepted Answer

The gain on the sale is calculated as the selling price minus the adjusted basis. The adjusted basis is calculated as the original cost minus accumulated depreciation. 
Adjusted basis = $12,849 - $3,855 = $8,994
Gain = $14,853 - $8,994 = $5,859
Since the equipment is classified as Section 1245 property (depreciable personal property), $3,855 of the gain is treated as ordinary income under Section 1245 (the amount of depreciation taken). The remaining $2,004 is a Section 1231 gain (the difference between the selling price and the adjusted basis) and can be treated as either ordinary income or capital gain depending on the taxpayer's overall gain/loss on Section 1231 property for the year.

Keiko Sells a Piece of Equipment Used in Her Business