An unincorporated business sold two warehouses during the current year.The straight-line depreciation method was used for the first building and the accelerated method (ACRS)was used for the second building.Information about those buildings is presented below. How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

Question

An unincorporated business sold two warehouses during the current year.The straight-line depreciation method was used for the first building and the accelerated method (ACRS)was used for the second building.Information about those buildings is presented below.  How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

Quizplus · Accepted Answer

To calculate the gain from these sales that should be reported as section 1231 gain and ordinary income due to depreciation recapture, we need to calculate the adjusted basis, gain or loss, and depreciation recapture for each building.

For the first building: 
Adjusted basis = Original cost - Accumulated depreciation 
= $400,000 - ($400,000/25) x 5 
= $280,000 
Gain or loss = Selling price - Adjusted basis 
= $320,000 - $280,000 
= $40,000 
Depreciation recapture = Accumulated depreciation - Allowable depreciation 
= ($400,000/25) x 5 - ($280,000/25) x 5 
= $40,000 
Since the total depreciation recapture ($40,000) is less than the gain ($40,000), the entire gain should be reported as section 1231 gain.

For the second building: 
Adjusted basis = Original cost - Accumulated depreciation 
= $600,000 - $320,000 
= $280,000 
Gain or loss = Selling price - Adjusted basis 
= $520,000 - $280,000 
= $240,000 
Depreciation recapture = Lesser of: 
- Accumulated depreciation - Allowable depreciation 
= ($600,000/15) x 5 - ($280,000/15) x 5 
= $200,000 
- Gain from sale 
= $240,000 
Depreciation recapture = $200,000 
Since the depreciation recapture ($200,000) is less than the gain ($240,000), $200,000 should be reported as ordinary income due to depreciation recapture, and the remaining $40,000 should be reported as section 1231 gain.

Therefore, the total gain from these sales that should be reported as section 1231 gain and ordinary income due to depreciation recapture is $240,000 (ordinary income) + $40,000 (section 1231 gain) = $280,000.

The correct answer is B.

An Unincorporated Business Sold Two Warehouses During the Current Year