Hurst Company purchased a commercial building in 2001 for $700,000.The building is sold in 2017 for $900,000.The actual depreciation deducted on the building as of the sale date was $600,000.Straight-line depreciation for the same period would have been $400,000.What is the amount and character of the gain recognized on the sale?

Question

Quizplus · Accepted Answer

The gain recognized on the sale would be calculated as follows:

Sale Price: $900,000 
Adjusted Basis: $700,000 - $600,000 = $100,000 
Realized Gain: $900,000 - $100,000 = $800,000

Since the building was held for more than one year, the gain will be classified as long-term.

However, since the actual depreciation deducted on the building exceeds the straight-line depreciation by $200,000, this excess will be considered depreciation recapture and will be taxed as ordinary income.

Therefore, the gain recognized on the sale will be $200,000 of ordinary income and $600,000 of Section 1231 gain. Option E is the only choice that reflects this outcome.

Hurst Company Purchased a Commercial Building in 2001 for $700,000