Brad sold a rental house that he owned for $245,500. Brad bought the rental house five years ago for $229,500 and has claimed $47,750 of depreciation expense. What is the amount and character of Brad's gain or loss?

Question

Quizplus · Accepted Answer

To calculate Brad's gain or loss, we need to start with his adjusted basis in the rental house, which is the original purchase price of $229,500 minus the accumulated depreciation of $47,750, or $181,750.

The amount realized on the sale is $245,500, so the gain before considering depreciation is $245,500 - $181,750 = $63,750.

Since Brad held the rental house for more than one year, the gain is a long-term capital gain. However, the gain is also subject to unrecaptured §1250 recapture, which means that a portion of the gain (equal to the amount of depreciation claimed) is taxed at a maximum rate of 25% instead of the usual long-term capital gains rate.

The amount of unrecaptured §1250 gain is $47,750 (equal to the accumulated depreciation), and the remaining gain ($63,750 - $47,750 = $16,000) is a §1231 gain. Therefore, the correct answer is B: $16,000 §1231 gain and $47,750 unrecaptured §1250 gain.

Brad Sold a Rental House That He Owned for $245,500