R realized a gain of $10,000 on a fire that destroyed part of a warehouse.R also sold several assets during the current taxable year as follows: Business use equipment held three years $ 3,000 gain
Investment land held 15 years 12,000 gain
Travel trailer used for personal trips 4,000 loss
The depreciation allowed on the equipment was $6,500 and was calculated using the straight line method.Assuming R's taxable income is $70,000 before these transactions, what is his taxable income for the year (assuming these items do not affect any other deductions)?

Question

Quizplus · Accepted Answer

First, we need to calculate R's total gains and losses:

Fire gain: $10,000
Business equipment gain: $3,000
Investment land gain: $12,000
Travel trailer loss: $4,000
Depreciation allowed: -$6,500

Total gains and losses: $14,500

Next, we need to determine how the gains and losses are classified for tax purposes. The fire gain is considered an "extraordinary" gain and is not taxed as a capital gain. The business equipment and investment land gains are both long-term capital gains since they were held for more than one year. The travel trailer loss is a personal loss and cannot be used to offset any gains.

So, R's taxable gains are:

Long-term capital gains: $15,000 ($3,000 + $12,000)

Extraordinary gain (not taxed as capital gain): $10,000

Net gains: $25,000

Since R's taxable income before these transactions was $70,000, we add the net gains to that amount to get his new taxable income:

New taxable income: $70,000 + $25,000 = $95,000

Therefore, the answer is choice C, $95,000, $22,000 of which is long-term capital gain.

R Realized a Gain of $10,000 on a Fire That