A business acquires a rental property several years ago for $562,000, with $112,000 of this amount being the estimated value of the land. At the beginning of the current year the UCC for the property is $374,561. During the current year, the property is sold for $843,000, with $262,000 of this amount being allocated to the land. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

To calculate the recapture amount, we need to determine the UCC at the time of sale. The UCC will be reduced by the proceeds allocated to the land, which is $262,000. Therefore, the UCC at the time of sale is $374,561 - $262,000 = $112,561.

The proceeds from the sale ($843,000) need to be allocated between the land and the building based on their respective values. The value of the building can be calculated as follows: 
Building value = Total value - Land value 
Building value = $843,000 - $262,000 = $581,000

The business will have a capital gain on the sale of the building, calculated as: 
Sale price - UCC - Capital cost allowance (CCA) 
Sale price - $112,561 - ($843,000 - $262,000) x 4% = $131,000

The CCA calculation assumes that the building was subject to the 4% declining balance method.

The business will also have recapture on the sale of the building, calculated as: 
UCC - Proceeds allocated to building - CCA claimed 
$112,561 - $581,000 - ($581,000 x 4%) = $75,439

Therefore, the correct answer is B. The business will have recapture of $75,439 and a capital gain of $281,000.

A Business Acquires a Rental Property Several Years Ago for $562,000