Kate bought residential rental property for $500,000.She reported a total of $100,000 of straight-line depreciation.Kate sells the building in 2016 for $425,000.What are the immediate tax consequences of the sale? (Do not consider Kate's other transactions).
I.If Kate's rental activity is a production-of-income (investment)activity,she will report a $25,000 long-term capital gain.
II.If Kate's rental activity is a trade or business,she will report $25,000 of Unrecaptured Section 1250 gain.

Question

Kate bought residential rental property for $500,000.She reported a total of $100,000 of straight-line depreciation.Kate sells the building in 2016 for $425,000.What are the immediate tax consequences of the sale? (Do not consider Kate's other transactions).
I.If Kate's rental activity is a production-of-income (investment)activity,she will report a $25,000 long-term capital gain.
II.If Kate's rental activity is a trade or business,she will report $25,000 of Unrecaptured Section 1250 gain.
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Quizplus · Accepted Answer

Since Kate reported straight-line depreciation, the property was held for more than one year. If the rental activity is a trade or business, the gain on sale qualifies as Unrecaptured Section 1250 gain. In this case, the gain is $25,000 ($425,000 - [$500,000 - $100,000]). If the rental activity is an investment activity, the gain is a long-term capital gain, which is also $25,000 ($425,000 - $500,000). Therefore, statement I is incorrect, and statement II is correct.

Kate Bought Residential Rental Property for $500,000