Nancy acquired office equipment for her business three years ago at a cost of $15,000.During the current year,she exchanges the equipment for different equipment with a fair market value of $9,000.MACRS depreciation on the original equipment was $9,828.The exchange qualifies as a like-kind exchange.Immediately after the exchange Nancy sells the new equipment for $9,000 cash.What is the amount and character of the gain recognized?
A)No gain or loss.
B)$3,828 Section 1231 gain.
C)$3,828 Section 1245 ordinary income.
D)$6,000 Section 1245 ordinary income
E)$9,828 section 1245 ordinary income and $6,000 Section 1231 loss.

Question

Quizplus · Accepted Answer

Since the exchange qualifies as a like-kind exchange, Nancy must use the adjusted basis of the original equipment as the basis for the new equipment. The adjusted basis of the original equipment is the original cost minus the accumulated depreciation, which in this case is $15,000 - $9,828 = $5,172. Since the fair market value of the new equipment received in the exchange is $9,000, Nancy has a realized gain of $3,828 ($9,000 - $5,172). This gain is treated as Section 1245 ordinary income because the original equipment was 5-year property under MACRS. When Nancy sells the new equipment for cash, she recognizes an additional $9,000 of ordinary income, resulting in a total recognized gain of $12,828.

Nancy Acquired Office Equipment for Her Business Three Years Ago