Kuong Inc. sold a commercial office building used in the corporate business for $1.5 million. Kuong purchased the building in 1999 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

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To determine the characterization of the gain on the sale of the building, we need to calculate the adjusted basis of the property, which is the original cost minus accumulated depreciation:

Adjusted basis = $1.4 million - $538,000 = $862,000

The selling price of $1.5 million exceeds the adjusted basis of $862,000, resulting in a gain of $638,000.

Section 1231 of the Internal Revenue Code governs the tax treatment of gains and losses from involuntary conversions and certain dispositions of business property. Since the building was used in the corporate business, it qualifies as Section 1231 property.

According to the IRS, gains from Section 1231 property are first netted against losses from other Section 1231 property. If the result is a net gain, it is characterized as a Section 1231 gain.

In this case, there are no other Section 1231 gains or losses, so the entire $638,000 gain should be characterized as a Section 1231 gain.

However, if any portion of the gain had been from depreciation recapture (i.e., the portion of the gain attributable to the accumulated depreciation claimed on the property), it would be characterized as ordinary income. In this case, there is no depreciation recapture since the gain exceeds the adjusted basis.

Therefore, the best choice is B, which correctly identifies the entire gain as a Section 1231 gain.

Kuong Inc Sold a Commercial Office Building Used in the Corporate