John Thayer purchased an apartment building eight years ago, for $200,000. The building was depreciated on the straight-line method. On December 31, year one, the building was sold for $220,000, when the asset balance net of accumulated depreciation was $170,000. On his year one tax return, Thayer should report:
Section 1231 gain of $20,000 and ordinary income of $30,000.
Section 1231 gain of $30,000 and ordinary income of $20,000.
ordinary income of $50,000.
Section 1231 gain of $50,000.
ANSWER: The correct answer is D. Section 1231 gain of $50,000. The building is a Section 1231 asset. None of the gain is ordinary because the depreciation, or cost recovery, was under the straight-line method. (There was no excess over straight-line.)
Selling price of building $220,000
Adjusted basis of building (170,000)
Realized Section 1231 gain $50,000
My initial reaction was leading me to the first answer. How do you differentiate between when you use depreciation recapture as ordinary income, and when do you consider the entire gain above the basis as 1231 gain?
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