Dallas Wildcat Drilling Co.sells an oil-drilling rig for $3,000,000.The drilling rig was purchased in 2007 for $2,000,000.Depreciation deductions of $1,200,000 have been taken up to the time of sale.What amount and character of gain will Dallas report from the sale of this asset?

Question

Quizplus · Accepted Answer

The gain is calculated as the sale price ($3,000,000) minus the adjusted basis ($2,000,000 - $1,200,000 depreciation = $800,000), resulting in a $2,200,000 gain. The $1,200,000 depreciation is recaptured as Section 1245 ordinary income, and the remaining $1,000,000 is a Section 1231 gain.