Eric purchased a building in 2008 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 used the straight-line method for the building, his basis in 2008 will be $420,000 - $120,000 = $300,000. When he sells the building for $560,000, he will have a gain of $260,000 ($560,000 - $300,000). This gain is a long-term capital gain because Eric held the building for more than one year.

Part of this gain will be treated as unrecaptured Sec. 1250 gain, which is gain attributable to the depreciation claimed on the building. To calculate this amount, we take the lesser of the depreciation claimed ($120,000) or the gain on the sale ($260,000), which is $120,000. Therefore, $120,000 of Eric's gain will be considered unrecaptured Sec. 1250 gain and will be taxed at a maximum rate of 25%.

The remaining gain of $140,000 will be treated as Sec. 1231 gain, which is gain from the sale of business assets. This gain is taxed at a maximum rate of 20%.

Therefore, the total tax liability on Eric's gain will be $120,000 x 25% = $30,000 for the unrecaptured Sec. 1250 gain and $140,000 x 20% = $28,000 for the Sec. 1231 gain, for a total tax liability of $58,000.

Eric Purchased a Building in 2008 That He Uses in His