In 1980,Mr.Lyle purchased a factory building to use in business for $480,000.When Mr.Lyle sells the building for $580,000,he has taken depreciation of $470,000.Straight-line depreciation would have been $400,000.Mr.Lyle must report
A)$570,000 of ordinary gain.
B)$570,000 of Sec.1231 gain.
C)$70,000 of ordinary income and $500,000 of Sec.1231 gain.
D)$470,000 of ordinary gain and $100,000 of Sec.1231 gain.

Question

Quizplus · Accepted Answer

First, we need to calculate the adjusted basis of the building, which is the original purchase price minus the cumulative depreciation taken.

Adjusted basis = $480,000 - $470,000 = $10,000

Next, we need to calculate the taxable gain on the sale of the building.

Taxable gain = Selling price - adjusted basis = $580,000 - $10,000 = $570,000

Since Mr. Lyle took more depreciation than he would have under straight-line depreciation, the excess depreciation is considered "recaptured" and taxed as ordinary income.

Recaptured depreciation = Total depreciation taken - Straight-line depreciation = $470,000 - $400,000 = $70,000

Therefore, the taxable gain is split into $70,000 of ordinary income (recaptured depreciation) and $500,000 of Section 1231 gain (the remainder).

The answer is C, $70,000 of ordinary income and $500,000 of Sec.1231 gain.