George purchased a commercial building in 1999 for $900,000. During 2018, the building is sold for $700,000. The actual accelerated depreciation on the building as of the sale date was $400,000. Straight-line depreciation for the same period would have been $350,000. What is the amount and character of the gain recognized on the sale?

Question

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The building was sold for $700,000, which is less than its original cost of $900,000. Therefore, there is a loss on the sale. However, we need to calculate the character of the gain recognized. We start by comparing the actual accelerated depreciation taken with the straight-line depreciation that should have been taken.

The difference between accelerated and straight-line depreciation is $400,000 - $350,000 = $50,000. This amount represents depreciation that was taken in excess of what would have been taken under straight-line. This excess depreciation is treated as Section 1250 ordinary income.

The unrecaptured Section 1250 gain is the amount by which the depreciation actually taken exceeds the depreciation that would have been taken under straight-line. In this case, that amount is $50,000. The remaining $150,000 is treated as a capital loss.

Therefore, the gain recognized on the sale is $50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250 gain.

George Purchased a Commercial Building in 1999 for $900,000