Question

fine following information applies to the questions displayed below.) Tonya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, DC. She doesn't sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business to buy a place somewhere sunny and warm. Tonya's townhouse is worth $1,000,000 and the land is worth another $1,000,000. The original basis in the townhouse was $600,000, and she has claimed $250,000 of depreciation deductions against the asset over the years. The original basis in the land was $500,000. Tonya has located a buyer that would like to finalize the transaction in December of the current year. Tonya's marginal ordinary income tax rate is 35 percent and her capital gains tax rate is 20 percent. Problem 3-52 Part-a Required: a1. What amount of gain or loss does Tonya recognize on the sale? a 2. What is the character of the gain or loss? a3. What effect does the gain or loss have on her tax liability or (tax savings)? nswers in the tabs below.

Answer 1

Tonya has a 1231 gain in selling both townhouse and land. Unrecaptured 1231 gain are taxed at a maximum rate of 25% and other 1231 gain are taxed at a maximum rate of 15%. Tonya's amount of gain or loss, character of the gain or loss and her tax liability with this gain or loss are calculated as follows:

a1. & a2. Calculation of the amount of gain or loss recognised as well as their character

Particulars of Building sale	Amount
1.Amount Realized	$1,000,000	Given
2.Original basis	$600,000	Given
3.Accumulated Depreciation	($250,000)	Given
4.Adjusted Basis	$350,000	(2 + 3)
5. Gain/Loss Recognised	$650,000	(1 - 4)
6. Unrecaptured 1250 gain	$250,000	Lesser of 5 or 3
7. Remaining 1231 gain	$400,000	(5 - 6)
8. Total 1231 gain	$650,000	(6 + 7)

Particulars of Land Sale	Amount
1. Amount realized	$1,000,000	Given
2. Original basis	$500,000	Given
3.Accumulated Depreciation	$0	Given
4. Adjusted basis	$500,000	(2 - 3)
5. 1231 Gain/Loss Recognised	$500,000	(1 - 2)

a3. Tax Liability on this gain

Character	Amount	Rate	Tax
Uncaptured 1250 (1231 gain)	$250,000	25%	$62,500
Other 1231 gain	$900,000	15%	$135,000
Total Tax			$197,500