Eric purchased a building in 2005 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 uses the straight-line method for cost recovery, the building has been depreciated by $120,000 ($420,000 original cost - $120,000 cost-recovery deductions = $300,000 adjusted basis). 
When the building is sold for $560,000, Eric has a gain of $260,000 ($560,000 sale price - $300,000 adjusted basis = $260,000 gain). This gain is classified as Sec.1231 gain, which is a type of long-term capital gain. 
However, since Eric is in the top tax bracket and has never sold any other business assets, $120,000 of the gain ($120,000 of the $260,000 gain) is classified as unrecaptured Sec.1250 gain, which is taxed at a maximum rate of 25%. The remaining $140,000 of the gain ($260,000 gain - $120,000 unrecaptured Sec.1250 gain) is taxed as long-term capital gain at a maximum rate of 20%. 
Therefore, the best answer is C, which recognizes that Eric has a Sec.1231 gain, of which $120,000 is unrecaptured Sec.1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.

Eric Purchased a Building in 2005 That He Uses in His