[Anonymous]

1.Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer’s depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain?

a. $27,700

b. $0

c. $7,000

d. $20,700

Correct Answer : c

2.A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (Gain from Dispositions of Certain Depreciable Property)?

a. $17,000

b. $13,000

c. $30,000

d. $20,000

Correct Answer : d

I am fine with the Q1. Regarding to Q2, I know Section 1245 requires that the lesser of the depreciation taken or the gain recognized be recaptured. But the gain recognized I use

($200,000 – <$180,000-$30,000> = $50,000), so I choose $30,000 instead of the correct answer 20,000. Why can’t we just minus depreciation to have adjusted basis like Q1 ?

Thanks

[spartancpa15]

Key word is “adjusted” basis

Meaning the $180,000 is not the original cost of the equipment…..it is the adjusted basis as of the date of sale…so,

Realized gain = (200,000 – 180,000) = 20,000

Depreciation taken = 30,000

1245 recapture = 20,000 (total gain realized is recognized as ordinary income)

FAR - Aug '14 - 90
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REG - May '15 - 93
BEC - July '15 - 85

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Master of Science in Accounting (focus in Tax) May '15

[SponsoredByDunkinDonuts]

In the first question it just tells you the purchase price, and you must subtract depreciation to arrive at the Adjusted Basis. In the second question it gives you the adjusted basis. It tells you there is 30,000 of depreciation, but that amount has already been subtracted out from the original cost to arrive at the given adjusted basis.

AUD- 99 (11/26/2014)
BEC- 81 (1/12/2015)
REG- 85 (2/28/2015)
FAR- ?? (5/18/2015)

[mt3130]

With 1245 property, gains are only taxed as capital gains to the extent that the sales price exceeds the original purchase price, as seen in the first example. The first example would result in an ordinary gain of 20,700 and a capital gain of 7,000

If the sale price is less than the original purchase price, none of the gain is taxed as a capital gain. It is all taxed at ordinary rates as depreciation recapture, as seen in the second example. Since the original price was 210,000 (180,000 + 30,000), and the sale price was 200,000, you would simply have 20,000 of ordinary income (200,000 – 180,000 = 20,000).

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[Author]

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