Norm acquired office equipment for his business at a cost of $10,000. After two years of use, Norm exchanges the equipment for different equipment with a fair market value of $7,000. MACRS depreciation on the original equipment was $4,753. What is the amount and character of the gain recognized?
A)No gain or loss.
B)$1,753 Section 1231 gain.
C)$1,753 Section 1245 ordinary income.
D)$4,753 Section 1231 gain.
E)$4,753 section 1245 ordinary income, and $3,000 Section 1231 loss.

Question

Quizplus · Accepted Answer

Since the original equipment was depreciated using MACRS, it is considered Section 1245 property. The difference between the adjusted basis of $5,247 ($10,000 cost - $4,753 depreciation) and the fair market value of the new equipment of $7,000 is a taxable gain of $1,753. This gain is considered ordinary income since it is from the disposition of Section 1245 property.

Norm Acquired Office Equipment for His Business at a Cost