Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?

Question

Quizplus · Accepted Answer

(1) Automobile: $12,000 loss, treated as ordinary loss.
(2) Machinery: $5,000 loss (proceeds $10,000 - adjusted basis $20,000), treated as §1231 loss.
(3) Furniture: $6,000 loss, treated as ordinary loss.
(4) Computer equipment: $19,000 gain (proceeds $10,000 - adjusted basis $6,000 - unrecaptured losses $3,000), treated as §1231 gain.
Total gains and losses before the 1231 netting process:
Ordinary loss: $18,000
Ordinary gain: $19,000
§1231 loss: $10,000
§1231 gain: $19,000 - $3,000 = $16,000
Therefore, the best choice is (B) $7,000 ordinary gain, $10,000 §1231 loss.

Winchester LLC Sold the Following Business Assets During the Current