Winchester LLC sold the following business assets during the current year: (1)automobile, $30,000 cost basis, $12,000 depreciation, $20,000 proceeds; (2)machinery, $25,000 cost basis, $20,000 depreciation, $10,000 proceeds; (3)furniture, $15,000 cost basis, $10,000 depreciation, $4,000 proceeds; (4)computer equipment, $25,000 cost basis, $6,000 depreciation, $10,000 proceeds; (5)Winchester had unrecaptured §1231 losses of $3,000 in the prior five years. What are the amount and character of Winchester's gains and losses before the §1231 netting process? Assume all assets were held for more than one year.

Question

Quizplus · Accepted Answer

For each asset, we need to calculate the gain or loss before the §1231 netting process:

(1) Automobile: $20,000 - ($30,000 - $12,000) = $2,000 gain
(2) Machinery: $10,000 - ($25,000 - $20,000) = $5,000 loss
(3) Furniture: $4,000 - ($15,000 - $10,000) = $1,000 loss
(4) Computer equipment: $10,000 - ($25,000 - $6,000) = $9,000 loss

Therefore, the total gains and losses before the §1231 netting process are: 
$2,000 + ($5,000) + ($1,000) + ($9,000) = $7,000 ordinary gain and $10,000 §1231 loss.

Note that the unrecaptured §1231 losses of $3,000 are not relevant until the netting process.

Winchester LLC Sold the Following Business Assets During the Current