Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV). Both assets were acquired three years ago, are used in Emma's business, and are depreciated using straight- line depreciation. Both are destroyed by fire. Insurance proceeds were equal to their FMVs. Only one other transfer of an asset occurs during the year, and a $3,000 LTCL is recognized. After considering all transactions, the tax result to Emma is a

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The building and equipment are Section 1231 assets. The insurance proceeds result in a $3,000 gain on the building ($123,000 FMV - $120,000 basis) and a $13,000 loss on the equipment ($22,000 FMV - $35,000 basis). The net result is a $10,000 ordinary loss ($13,000 loss - $3,000 gain). The $3,000 LTCL is separate and results in a $3,000 net long-term capital loss (NLTCL).

Emma Owns a Small Building ($120,000 Basis and $123,000 FMV)