Nancy acquired office equipment for her business in 2010 at a cost of $15,000. During the current year, she exchanges the equipment for different equipment with a fair market value of $9,000. MACRS depreciation on the original equipment was $9,828. The exchange qualifies as a like-kind exchange. Immediately after the exchange Nancy sells the new equipment for $9,000 cash. What is the amount and character of the gain recognized?
A) No gain or loss.
B) $3,828 Section 1231 gain.
C) $3,828 Section 1245 ordinary income.
D) $6,000 Section 1245 ordinary income
E) $9,828 section 1245 ordinary income and $6,000 Section 1231 loss.

Question

Quizplus · Accepted Answer

The gain recognized is $3,828, which is the lesser of the realized gain ($3,828) or the depreciation recapture ($9,828). Since the exchange is a like-kind exchange, the gain is recognized as Section 1245 ordinary income due to depreciation recapture rules.

Nancy Acquired Office Equipment for Her Business in 2010 at a Cost