On December 31,2011,Harold,a sole proprietor,sold for $85,000 a machine that was used in his business.The machine had been purchased in 2006 for $60,000,and when it was sold it had an adjusted basis of $45,000.For the year 2011,how should this gain be treated?

Question

Quizplus · Accepted Answer

The gain of $40,000 ($85,000 selling price minus $45,000 adjusted basis) on the sale of the machine is a Section 1231 gain. Section 1231 applies to property used in a trade or business and held for more than one year. Since Harold held the machine for more than one year and used it in his business, the gain is treated as a Section 1231 gain.

The $15,000 difference between the selling price of $85,000 and the original cost of $60,000 is taxed as ordinary income since it represents depreciation recapture (the amount of depreciation previously claimed on the machine that exceeded its basis). Therefore, the correct treatment of the gain is a Section 1231 gain of $25,000 and ordinary income of $15,000.

On December 31,2011,Harold,a Sole Proprietor,sold for $85,000 a Machine That