Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straightline depreciation).Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts?
$\begin{array}{ll}\text { Section } 1231 \text { Gain }&\text { Unrecaptured } \S 1250 \text { Gain Taxed at } 25 \%\
\text { a. } \$ 66,000 & \$ 0 \
\text { b. } \$ 0 & \$ 66,000 \
\text { c. } \$ 90,000 & \$ 90,000 \
\text { d. } \$ 90,000 & \$ 0 \
\text { e. } \$ 0 & \$ 110,000
\end{array}$

Question

Albert is in the 35% marginal tax bracket.He sold a building in the current year for $450,000.Albert received $110,000 cash at closing,the buyer assumed Albert's mortgage for $120,000,and the buyer gave Albert a 6% note for $220,000 due in two years.The Federal rate was 6%.Albert's basis in the building was $180,000 ($500,000 cost - $320,000 accumulated straight­line depreciation).Assuming he did not elect out of the installment method,Albert's § 1231 gain and gain taxed at the 25% rate in the year of sale are what amounts?
$\begin{array}{ll}\text { Section } 1231 \text { Gain }&\text { Unrecaptured } \S 1250 \text { Gain Taxed at } 25 \%\
\text { a. } \$ 66,000 & \$ 0 \
\text { b. } \$ 0 & \$ 66,000 \
\text { c. } \$ 90,000 & \$ 90,000 \
\text { d. } \$ 90,000 & \$ 0 \
\text { e. } \$ 0 & \$ 110,000
\end{array}$

Quizplus · Accepted Answer

The total realized gain is $270,000 ($450,000 amount realized - $180,000 adjusted basis).The contract price is $330,000 ($450,000 - $120,000 seller's mortgage assumed by the buyer).The entire recognized gain of $90,000 in the year of sale is unrecaptured § 1250 gain because it is less than the depreciation (straight line)that was deducted ($320,000).
 $$\frac { \$ 270,000 } { \$ 330,000 } = 81.82 \% \text { gross profit percentage }$$ $110,000 payments × 81.82% = $90,000 recognized § 1231 gain There is no § 1250 depreciation recapture because the straight­line method was used.The unrecaptured § 1250 gain is taxed at the 25% alternative tax rate.

Albert Is in the 35% Marginal Tax Bracket