Beige Corporation, a C corporation, purchases a warehouse on August 1, 1998, for $1 million. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11, 2014, for $1.2 million. What is the amount and character of the gain recognized by Beige on the sale of the realty?
A) Ordinary income of $0 and § 1231 gain of $611,750.
B) Ordinary income of $411,750 and § 1231 gain of $200,000.
C) Ordinary income of $82,350 and § 1231 gain of $529,400.
D) Ordinary income of $117,650 and § 1231 gain of $494,100.
E) None of the above.

Question

Quizplus · Accepted Answer

When a C Corporation sells a property used in its trade or business, the gain or loss is classified as either ordinary income or § 1231 gain or loss.

In this case, the property was held for more than a year and was used in the corporation's trade or business.

The calculation of the gain recognized is as follows:

Sales price: $1,200,000
Adjusted basis (purchase price - depreciation): $1,000,000 - $411,750 = $588,250

Total gain: $1,200,000 - $588,250 = $611,750

Since the property was held for investment, the gain is classified as § 1231 gain. However, because straight-line depreciation was taken on the property, a portion of the gain will be recaptured as ordinary income.

The amount of depreciation recapture is the lesser of the depreciation taken or the gain recognized. In this case, the depreciation taken is $411,750, which is less than the gain recognized of $611,750, so the entire depreciation amount is recaptured as ordinary income.

Therefore, the amount and character of the gain recognized by Beige on the sale of the realty is:

Ordinary income: $411,750 x 25% = $102,938

§ 1231 gain: $611,750 - $102,938 = $508,812

Thus, the best choice is C, with ordinary income of $82,350 and § 1231 gain of $529,400, which is the correct calculation considering the depreciation recapture.

Beige Corporation, a C Corporation, Purchases a Warehouse on August