Firm F purchased a commercial office building for business use in 2004 for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

If Firm F is a corporation, it would recognize both ordinary income and Section 1231 gain upon the sale of the building. The amount of ordinary income recognized is the lesser of the accumulated depreciation or the gain from the sale, which is $275,000. Therefore, the remaining $725,000 is Section 1231 gain.

However, if Firm F is a noncorporate taxpayer, it would only recognize Section 1231 gain, which is calculated as the sale price minus the adjusted basis (original cost minus accumulated depreciation). In this case, the adjusted basis would be $690,000 ($965,000 - $275,000), and the Section 1231 gain would be $310,000 ($1 million - $690,000).

Therefore, both options a. and c. are true.

Firm F Purchased a Commercial Office Building for Business Use