Beige Corporation,a C corporation,purchases a warehouse on December 4,2001,for $500,000.Straight-line depreciation is taken in the amount of $104,701 before the property is sold on February 8,2010,for $600,000.What is the amount and character of the gain recognized by Beige on the sale of the realty?
A)Ordinary income of $0 and § 1231 gain of $204,701.
B)Ordinary income of $20,940 and § 1231 gain of $183,761.
C)Ordinary income of $40,940 and § 1231 gain of $163,760.
D)Ordinary income of $104,701 and § 1231 gain of $100,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Since the property has been held for more than one year, it qualifies as a § 1231 asset. The sale of the property generates a gain of $100,000 ($600,000 - $500,000). However, the depreciation taken on the property reduces the adjusted basis to $395,299 ($500,000 - $104,701). Therefore, the gain recognized is the lesser of the two: $100,000 or $204,701 (adjusted basis + depreciation). Since the gain recognized is less than the accumulated depreciation, some of the gain is treated as ordinary income, and the rest is treated as § 1231 gain. The amount of ordinary income is the excess of the accumulated depreciation over the gain recognized, which is $104,701 - $100,000 = $4,701. Therefore, the amount and character of the gain recognized by Beige on the sale of the realty is ordinary income of $20,940 ($4,701 x 0.444 = $20,940) and § 1231 gain of $183,761 ($100,000 - $20,940 = $79,060).

Beige Corporation,a C Corporation,purchases a Warehouse on December 4,2001,for $500,000