Question

1 ¨F.D. Roosevelt purchased an apartment building for $300,000. Accelerated depreciation was taken in the amount of $260,000 before the building was sold for $250,000. Straight-line depreciation would have been $245,000.

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¨How much gain does Roosevelt recognize?

¨How is Roosevelt’s gain classified?

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¨Would the answer change if F.D. Roosevelt is a corporation?

2 ¨Avocado, Inc. purchased a $100,000 machine and deducted $70,000 of depreciation before selling it for $80,000 (after holding it for more than 1 year). How much gain does Avocado recognize? How is the gain classified?

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¨How is the gain classified if Avocado sells the machine for $120,000?

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¨How is the loss classified if Avocado sells the machine for $25,000?

Answer 1

1.The Capital gains earned by Roosevelt on sale of Building for $ 250000. The calculation is as follows:

Sale consideration on sale of Building: $250000

Less: Purchase consideration:

($300000-$245000)- $55000

Capital gains recognized is $ 210000($250000-$40000)

The classification of gains is Short term capital gain because if we claimed depreciation that asset is under short term irrespective the holding period of the asset.

if F.D Roosevelt is a corporation the short term capital gains on sale of Building is as follows:

Sale consideration on sale of Building: $250000

Less: Purchase consideration:

($300000-$245000)- $55000

Capital gains recognized is $ 195000($250000-$55000)

2. Compution of Capital gains on sale of machinery of Avacado Inc.

Sale consideration on sale of Machinery: $80000

Less: Cost of the Machine:

($100000-$70000)- $30000

Capital gains recognized is $ 50000($80000-$30000). The gains are short term capital gains.

If sold the machine for $ 120000 the gains is $90000($120000-$30000). The gains are short term capital gains.

If sold the machine for $ 25000 the loss is $ 5000(25000-30000). The gains are short term capital gains.