Question

Brady sells equipment for $30,000 which had been purchased for $80,000 and on which $40,000 of depreciation had been taken. He had used the equipment in his business for several years. Brady has:

Group of answer choices

A $10,000 § 1231 loss.

A $10,000 § 1245 loss

A $30,000 § 1231 gain.

None of the above.

A $10,000 § 1250 loss.

Answer 1

Option 1 A $10,000 § 1231 loss

Section 1231 is applicable on real or depreciable property used in an active trade or business, and is held for more that 1 year.

Under section 1245, on sale of a property, one needs to recapture as ordinary income the lesser of the gain recognized or accumulated depreciation.

In this case there is no gain but loss and section 1245 rules do not apply if the asset is sold at loss. The loss is treated as a Section 1231 loss and is deducted as an ordinary loss which can reduce ordinary income.