Kate bought residential rental property for $500,000. She reported a total of $100,000 of straight-line depreciation. Kate sells the building in 2014 for $425,000. What are the immediate tax consequences of the sale? Do not consider Kate's other transactions). I. If Kate's rental activity is a production-of-income investment) activity, she will report a $25,000 long-term capital gain. II. If Kate's rental activity is a trade or business, she will report $25,000 of Unrecaptured Section 1250 gain.

Question

Quizplus · Accepted Answer

Kate's adjusted basis in the property is $400,000 ($500,000 - $100,000 depreciation). Selling for $425,000 results in a $25,000 gain. If the rental is a trade or business, this gain is Unrecaptured Section 1250 gain, taxed at a maximum of 25%.

Kate Bought Residential Rental Property for $500,000