Norm acquired office equipment for his business in 2011 at a cost of $10,000.After two years of use,Norm exchanges the equipment for different equipment with a fair market value of $7,000.MACRS depreciation on the original equipment was $4,753 The exchange qualifies as a like-kind exchange.Immediately after the exchange Norm sells the new equipment for $7,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$1,753 Section 1231 gain.
C)$1,753 Section 1245 ordinary income.
D)$4,753 Section 1231 gain.
E)$4,753 section 1245 ordinary income, and $3,000 Section 1231 loss.

Question

Quizplus · Accepted Answer

The exchange of equipment qualifies as a like-kind exchange and therefore, no gain or loss is recognized. However, since the original equipment was subject to MACRS depreciation, the difference between the adjusted basis (original cost - MACRS depreciation = $5,247) and the fair market value of the new equipment ($7,000) results in a $1,753 Section 1245 ordinary income. When Norm sells the new equipment for $7,000 cash, he realizes no additional gain or loss as the cash proceeds equal the fair market value of the equipment.

Norm Acquired Office Equipment for His Business in 2011 at a Cost