Eric purchased a building in 2003 that he uses in his business.Eric uses the straight-line method for the building.Eric's original cost for the building is $420,000 and cost-recovery deductions are $120,000.Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000,the tax results are
A)$260,000 Sec.1231 gain,all taxable at 20%.
B)$260,000 unrecaptured Sec.1250 gain,all taxable at 25%.
C)$260,000 Sec.1231 gain,of which $120,000 is unrecaptured Sec.1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
D)$120,000 Sec.1245 ordinary income,$140,000 Sec.1231 gain taxable at 20%.

Question

Quizplus · Accepted Answer

Since Eric has never sold any other business assets, all of the gain from the sale of the building will be classified as Sec.1231 gain. However, because Eric has claimed $120,000 in cost-recovery deductions, $120,000 of the gain will be classified as unrecaptured Sec.1250 gain, which is taxed at a maximum rate of 25%. The remaining $140,000 of the gain will be taxed at the maximum rate for long-term capital gains, which is currently 20%. Therefore, the correct answer is C.

Eric Purchased a Building in 2003 That He Uses in His