Alpha sold machinery,which it used in its business,to Beta,a related entity,for $40,000.Beta used the machinery in its business.Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense.What is the amount and character of Alpha's gain?

Question

Quizplus · Accepted Answer

When a related party purchases depreciable property from another related party, §1239 recharacterizes the entire gain as ordinary income. In this case, Alpha sold the machinery for $40,000, when the adjusted basis was only $20,000 ($50,000 cost - $30,000 depreciation). Therefore, Alpha has a $20,000 gain, which is recharacterized as ordinary income under §1239.

Alpha Sold Machinery,which It Used in Its Business,to Beta,a Related