[Anonymous]

Where did these 20% (?) and 80% (of the gain due to depreciation) come from?

Given facts:
Building owned by a corporation for 10 years.
$250,000 = Original cost
$65,000 = Accumulated Depreciation (Beginning of the year)
$200,000 = Sales price
$4,300 = Depreciation Recapture

Compute for:
1. Current year depreciation
2. Section 1231 Gain (Loss)

The answers are:
1. $6,500
2. $17,200

Explanation:
If the depreciation recapture was $4,300, the Section 1231 gain must be $17,200 because for real property sold by corporations, Section 1231 gain is the total of the gain from selling the property in excess of the original cost (which in this case was zero) plus 80 percent of the gain due to depreciation. So, if the amount reported as depreciation recapture gain was $4,300, then the total gain must have been $21,500 ($4,300 divided by 0.20 = $21,500) and the amount reported as Section 1231 gain is $17,200 ($21,500 × 80% = $17,200). If the total gain was $21,500 and the sales price was $200,000, the adjusted basis must have been $178,500 (Sales price of $200,000 – Gain of $21,500 = Adjusted basis of $178,500). If the adjusted basis was $178,500 and the original cost was $250,000, the accumulated depreciation at the time of the sale must have been $71,500 (Original cost of $250,000 – Adjusted basis of $178,500 = Accumulated depreciation at the time of the sale of $71,500). If the accumulated depreciation at the time of the sale was $71,500 and the accumulated depreciation at the beginning of the year was $65,000, the current year depreciation must be $6,500 (Accumulated depreciation at the time of the sale of $71,500 – Accumulated depreciation at the beginning of the year of $65,000 = Current year depreciation of $6,500).

[Recked]

1231 rules for corps differ from for personal.
I almost missed this my first time through the materials, but got caught on some MCQs with reference to it.

[Anonymous]

Recked is correct:

“5. Section 291 Recapture

a. The ordinary income element on the disposition of Sec. 1250 property by corporations is increased by 20% of the additional amount that would have been ordinary income if the property had instead been Sec. 1245 property or Sec. 1245 recovery property.” (Wiley)

[Anonymous]

Thanks Recked and Calvinus!

[Author]

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