Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 1996 for a cost of $1.4 million and had deducted $538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain recognized on sale as:

Question

Quizplus · Accepted Answer

The sale of the office building results in a gain of $638,000. Since the building was held for more than one year, the gain is considered long-term. Based on the information provided, Kuong has deducted $538,000 in MACRS depreciation, which is less than the original cost of $1.4 million, leaving a remaining basis of $862,000 ($1.4 million - $538,000). Therefore, the gain of $638,000 is allocated between ordinary income recapture (limited to the amount of depreciations taken) and Section 1231 gain. The amount of ordinary income recapture is $862,000 (remaining basis) - $1 (amount realized) = $861,999, which is limited to the total depreciation taken of $538,000. Hence, $538,000 is classified as ordinary income recapture and the remaining gain of $100,000 ($638,000 - $538,000) is classified as Section 1231 gain. Since the entire gain is a long-term capital gain, the entire Section 1231 gain is treated as long-term as well. Therefore, the correct answer is B.

Kuong Inc Sold a Commercial Office Building Used in the Corporate