Brandon,an individual,began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years.Brandon owned each of the assets for several years.In the current year,Brandon sold the following business assets: Assuming Brandon's marginal ordinary income tax rate is 35 percent,what effect do the gains and losses have on Brandon's tax liability?

Question

Brandon,an individual,began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years.Brandon owned each of the assets for several years.In the current year,Brandon sold the following business assets:  Assuming Brandon's marginal ordinary income tax rate is 35 percent,what effect do the gains and losses have on Brandon's tax liability?

Quizplus · Accepted Answer

- The sales of assets A, B, and F are §1231 gains, while the sale of asset C is a §1245 gain. The total §1231 gains are $25,000, and the total §1245 gain is $2,000, which results in a net §1231 gain of $23,000.
- Since Brandon has sold §1231 assets with losses in the past five years, the net §1231 gain of $23,000 is subject to recapture as ordinary income. 
- Brandon also has a $10,000 long-term capital loss carryover that can be used to offset the §1231 gain. Therefore, the taxable amount of the §1231 gain is reduced to $13,000 ($23,000 - $10,000).
- Brandon also has $12,000 of ordinary income from the sale of asset D, resulting in a total taxable income of $25,000 ($13,000 + $12,000).
- Brandon's marginal ordinary income tax rate is 35%, so his tax liability is $6,150 ($13,000 x 0.35).

Therefore, the correct answer is C.

Brandon,an Individual,began Business Four Years Ago and Has Sold §1231