[needhelpnow]

Thayer Corporation purchased an apartment building on January 10, 2008 for $200,000. The building was depreciated using the straight-line method. On February 20, 2014, the building was sold for $220,000, when the asset balance net of accumulated depreciation was $170,000. On its 2014 tax return, Thayer Corporation should report?

a Ordinary income of $50,000.

b Section 1231 gain of $44,000 and ordinary income of $6,000.

c Section 1231 gain of $42,500 and ordinary income of $7,500.

d Section 1231 gain of $50,000.

The answer is B, but why?!! They never give us a the value for the Straight Line (S/L) Depreciation to calculate the difference between S/L & 170K Depreciation…unless I am not comprehending the questions right. Please help in full explanation. Thank you 🙁

[seattleacct]

I think you need to use MACRS for tax purposes. I believe rental real estate is 27.5 year property and uses a mid-month convention.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

I think you need to use MACRS for tax purposes. I believe rental real estate is 27.5 year property and uses a mid-month convention.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

Ok, I was wrong. Short Answer: It has to do with Section 291. Corporations must increase ordinary income by 20%, of the depreciation amount for Sec. 1250 property (excess depreciation). If the building would have been sec. 1245 property, the full depreciation would have to be recaptured.

$200k-170k = 30k depreciation (1245 recapture) <– only calculate 20% of the 1245 recapture amount

$30k x 20% = 6,000 Ordinary Income

The remainder is a Sec. 1231 gain.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[seattleacct]

Ok, I was wrong. Short Answer: It has to do with Section 291. Corporations must increase ordinary income by 20%, of the depreciation amount for Sec. 1250 property (excess depreciation). If the building would have been sec. 1245 property, the full depreciation would have to be recaptured.

$200k-170k = 30k depreciation (1245 recapture) <– only calculate 20% of the 1245 recapture amount

$30k x 20% = 6,000 Ordinary Income

The remainder is a Sec. 1231 gain.

B:76
A:64, 73, 91!
R:77
F:76

CPAexcel, Wiley Test Bank, Ninja Audio & Notes

[needhelpnow]

That helps! Thank you Seattleacct!

[needhelpnow]

That helps! Thank you Seattleacct!

[LianaLee]

Although it is 2020 now, I'm still struggling with this question.
I find an explanation but don't know if I am right or not.
“when the asset balance net of accumulated depreciation was $170,000” is very trikcy. I think it means that “the asset balance after netting with accumulated depreciation was $170,000”, not “the accumulated depreciation was $170,000. Therefore, old basis was $200,000, accumulated depreciation should be $30,000 (200,000-170,000), and the balance before selling was $170,000. Plus, recaputure for Corp is 20% of lesser of recognized income(220,000-170,000=50,000) and accumulated stright line depreciation (30,000), so we get sec1250 recaputure 30,000*20%=6,000 as the ordinary gain, and the left 44,000 (50,000-6,000) was 1231 capital gain

[Author]

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