Beige Corporation,a C corporation,purchases a warehouse on August 1,1999,for $1 million.Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 11,2015,for $1.2 million.What is the amount and character of the gain recognized by Beige on the sale of the realty?
A)Ordinary income of $0 and § 1231 gain of $611,750.
B)Ordinary income of $411,750 and § 1231 gain of $200,000.
C)Ordinary income of $82,350 and § 1231 gain of $529,400.
D)Ordinary income of $117,650 and § 1231 gain of $494,100.
E)None of the above.

Question

Quizplus · Accepted Answer

The adjusted basis of the warehouse is $588,250 ($1 million - $411,750). The sale price of $1.2 million results in a gain of $611,750 ($1.2 million - $588,250).

Since the property was held for more than one year, the gain is a § 1231 gain. However, since straight-line depreciation was taken, a portion of the gain needs to be recaptured as ordinary income. The amount of depreciation recapture is calculated as the lesser of the depreciation taken or the gain realized, which is $411,750.

Therefore, the amount of ordinary income recognized is $82,350 ($411,750 x 20%) and the remaining amount of the gain is a § 1231 gain of $529,400 ($611,750 - $82,350). The correct answer is C.

Beige Corporation,a C Corporation,purchases a Warehouse on August 1,1999,for $1