Dallas Wildcat Drilling Co. sells an oil-drilling rig for $3,000,000. The drilling rig was purchased in 2012 for $2,000,000. Depreciation deductions of $1,200,000 have been taken up to the time of sale. What amount and character of gain will Dallas report from the sale of this asset?

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The gain is calculated as the difference between the sale price ($3,000,000) and the adjusted basis (original cost of $2,000,000 minus depreciation of $1,200,000, which equals $800,000), resulting in a total gain of $2,200,000. The depreciation recapture of $1,200,000 is treated as ordinary income under Section 1245, and the remaining gain of $1,000,000 is treated as Section 1231 gain, which can be taxed as long-term capital gain if the asset was held for more than one year.