I am confused by this miserable gleim question.I see that 22000 would be sec 1245 ordinary gain and 7000 is sec 1231 capital gain.
What I don't get is the explanation:
“this Sec. 1231 gain is re-characterized as ordinary income to the extent of depreciation recaptured ($22,000) and to the extent of any unaccounted for Sec. 1231 loss ($6,000). The remaining $1,000 is recognized as a Sec. 1231 gain.”
Why do they call 22000 section 1231 gain? When does it become 1245? Am I reading this wrong?
John owned a printing business and sold the following assets in Year 2:
Printing press:
Sales price
$25,000
Original cost
20,000
Allowed or allowable depreciation
8,000
Computer equipment:
Sales price
$30,000
Original cost
28,000
Allowed or allowable depreciation
14,000
John had a net Sec. 1231 loss of $6,000 in Year 1. What is the amount and character of John’s gain for Year 2?
A. $28,000 ordinary income; $1,000 capital gain.
Answer (A) is correct.
Sec. 1231 property is depreciable or real property used in a trade or business and held for more than 1 year or an involuntarily converted nonpersonal capital asset (i.e., held in connection with a trade or business or a transaction entered into for profit) held for more than 1 year. A taxpayer who has a net Sec. 1231 gain (i.e., excess of Sec. 1231 gains over Sec. 1231 losses) for the tax year must review the 5 most recent preceding tax years for possible recapture of net Sec. 1231 losses for such years. If there were any net Sec. 1231 losses during such period, the taxpayer must treat the current year’s net Sec. 1231 gain as ordinary income to the extent of the amount of unrecaptured net Sec. 1231 losses for that past period [Sec. 1231(c)]. The losses are to be recaptured on a first-in, first-out (FIFO) basis. John realizes a total gain of $29,000. Since the assets also qualify as Sec. 1245 property, this Sec. 1231 gain is recharacterized as ordinary income to the extent of depreciation recaptured ($22,000) and to the extent of any unaccounted for Sec. 1231 loss ($6,000). The remaining $1,000 is recognized as a Sec. 1231 gain.
B. $14,000 ordinary income; $15,000 capital gain.
C. $0 ordinary income; $29,000 capital gain.
D. $22,000 ordinary income; $7,000 capital gain.
.