Mr. and Mrs. Marley operate a small business. This year, the Marleys sold a commercial office building used in their business for $1.1 million. They purchased the building in 1998 for a cost of $900,000 and have deducted $300,000 MACRS depreciation through date of sale. The Marleys should characterize the $500,000 gain recognized on sale as:

Question

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The Marleys should characterize the gain as Section 1231 gain because:
- The property was held for more than one year, making it a long-term capital asset.
- It was used in the Marleys' business, making it a Section 1231 asset.
- The amount of depreciation taken on the property ($300,000) is less than the original cost ($900,000), meaning that the Marleys have not fully recovered their basis in the property. Therefore, the entire $500,000 gain should be classified as Section 1231 gain, which is subject to more favorable tax rates than ordinary income.

Mr and Mrs