Winchester LLC sold the following business assets during the current year:
(1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000
(2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000
(3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000
(4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000
(5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years.
What is 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

Winchester LLC sold the following business assets during the current year:
(1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000
(2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000
(3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000
(4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000
(5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years.
What is 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.

Quizplus · Accepted Answer

All of the assets are §1231 assets: automobile $2,000 gain, machinery $5,000 gain, furniture $1,000 loss, and equipment $9,000 loss. The gains on the automobile and machinery are characterized as ordinary income to the extent the gains were created by depreciation deductions. This results in $7,000 ordinary gain and $10,000 §1231 loss. The §1231 look-back rule only applies when there is a net 1231 gain.

Winchester LLC Sold the Following Business Assets During the Current