Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last five years.Brandon owned each of the assets for several years.In the current year, Brandon sold the following business assets: $$\begin{array} { l r r r r }
&&{ \text { Accurnulated } }\
\text { Asset } & \text { Original Cost } &\text { Depreciation } & \text { Gair/Loss } \

\text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\text { Land } & 40,000 & 0 & 20,000 \
\text { Building } & 90,000 & 20,000 & ( 5,000 )
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability?
Use dividends and capital gains tax rates for reference.

Question

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last five years.Brandon owned each of the assets for several years.In the current year, Brandon sold the following business assets: $$\begin{array} { l r r r r } 
&&{ \text { Accurnulated } }\
\text { Asset } & \text { Original Cost } &\text { Depreciation } & \text { Gair/Loss } \

\text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \
\text { Land } & 40,000 & 0 & 20,000 \
\text { Building } & 90,000 & 20,000 & ( 5,000 )
\end{array}$$ Assuming Brandon's marginal ordinary income tax rate is 32 percent, what effect do the gains and losses have on Brandon's tax liability?
Use dividends and capital gains tax rates for reference.

Quizplus · Accepted Answer

First, we need to determine the classification of each asset sale. The sale of Machinery results in a §1231 gain of $13,000 (\$30,000 - \$7,000 - \$10,000 = \$13,000). The sale of Land results in a long-term capital gain of $20,000 (since it was held for more than one year) and the sale of Building results in a long-term capital loss of $5,000.

Next, we combine the gains and losses to determine the net §1231 gain for the year. The total gain is $13,000 and the total loss is $5,000, resulting in a net §1231 gain of $8,000.

Since Brandon has a §1231 loss of $5,000 from the previous five years, that loss is applied to reduce the net §1231 gain of $8,000. The remaining gain is $3,000.

The long-term capital gains tax rate for taxpayers in the 32 percent bracket is 15 percent. Therefore, Brandon's tax on the $20,000 long-term capital gain from the sale of Land is $3,000 ($20,000 x 15%).

To determine the tax liability for the year, we need to calculate Brandon's ordinary income tax first. Including the remaining $3,000 of §1231 gain, his total long-term capital gain is $23,000. Therefore, the taxable portion of his gain is $10,500 ($23,000 - $12,500, the long-term capital gains exemption).

Adding the $10,500 to his other taxable income, Brandon has $126,500 of ordinary income ($90,000 from the sale of Building and $26,500 from wages or other sources).

Using the tax table for single filers, Brandon's tax liability is $35,501.

Therefore, his total tax liability for the year is $38,501 (\$35,501 + \$3,000).

Brandon, an Individual, Began Business Four Years Ago and Has