Mountainview Corporation sells depreciable residential real estate for $525,000. The property cost $675,000, and $200,000 of accelerated depreciation was deducted on the property. Allowable straight-line depreciation for the same period would have been $180,000. Which of the following correctly states the character of the gain from the sale of the property?

Question

Quizplus · Accepted Answer

The first step is to calculate the adjusted basis of the property:
Cost = $675,000
Less: Accelerated depreciation = $200,000
Adjusted Basis = $475,000

The selling price of $525,000 exceeds the adjusted basis of $475,000, resulting in a gain of $50,000.

However, since the property was used in the taxpayer's trade or business, the gain is treated as Section 1231 gain.

Since the property was subject to accelerated depreciation, a portion of the gain will be treated as ordinary income under Section 1250. The amount of ordinary income is equal to the lesser of the accelerated depreciation taken ($200,000) or the gain recognized ($50,000). Therefore, $30,000 of the gain will be treated as Section 1231 gain and $20,000 will be treated as Section 1250 ordinary income.

Therefore, the correct answer is C.

Mountainview Corporation Sells Depreciable Residential Real Estate for $525,000