Marybelle paid $400,000 for a warehouse. Using 39-year straight-line depreciation, Marybelle deducts $24,868 for the first two years of usage. At the beginning of the third year, Marybelle sells the warehouse for $380,000. What is the character of the gain.

Question

Quizplus · Accepted Answer

Since the depreciation method is straight-line, the entire $400,000 cost basis is subject to depreciation. After two years, the accumulated depreciation would be $24,868 x 2 = $49,736. Thus, the adjusted basis of the warehouse would be $400,000 - $49,736 = $350,264 at the beginning of the third year. 
Since Marybelle sold the warehouse for $380,000, she realized a gain of $29,736 ($380,000 - $350,264). This gain is considered an unrecaptured section 1250 gain because it relates to depreciation deductions that were subject to a maximum 25% rate (section 1250) rather than the usual 20% rate for long-term capital gains. Therefore, the correct answer is (D) Unrecaptured section 1250 gain.

Marybelle Paid $400,000 for a Warehouse