How do they arrive at a gain of $50,000. I guess, gain should be $170,000. Your help is appreciated.
Question 1 (TPRO-0051B)
Thayer Corporation purchased an apartment building on January 1, 2014, for $200,000. The building was depreciated using the straight-line method. On December 31, 2017, the building was sold for $220,000, when the asset balance net of accumulated depreciation was $170,000. On its 2017 tax return, Thayer should report
Section 1231 gain of $42,500 and ordinary income of $7,500.
Section 1231 gain of $44,000 and ordinary income of $6,000.
Ordinary income of $50,000.
Section 1231 gain of $50,000.
Sec. 1250 recaptures gain as ordinary income to the extent of “excess” depreciation (i.e., depreciation deducted in excess of straight line). The total gain less any depreciation recapture is Sec. 1231 gain. Since straight-line depreciation was used, there is no recapture under Sec. 1250. However, Sec. 291 requires that the amount of ordinary income on the disposition of Sec. 1250 property by corporations be increased by 20% of the additional amount that would have been ordinary income if the property had instead been Sec. 1245 property. If the building had been Sec. 1245 property the amount of recapture would have been $30,000 ($200,000 − $170,000). Thus, the Sec. 291 ordinary income is $30,000 × 20% = $6,000. The remaining $44,000 is Sec. 1231 gain.
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