Question

Lorenzo is the sole proprietor of a trampoline shop. During 2019, the following transactions occurred.

1. Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had an allocable basis of $40,000. Lorenzo has additional parking across the street and plans to use the condemnation proceeds to build his inventory.
   
2. A truck used to deliver trampolines was sold on January 2 for $3,500. The truck was purchased on January 2, 2014, for $6,000. On the date of sale, the adjusted basis was zero.
   
3. Lorenzo sold an antique rowing machine at an auction. Net proceeds were $4,900. The rowing machine was purchased as used equipment 17 years ago for $5,200 and is fully depreciated.
   
4. Lorenzo sold an apartment building for $300,000 on September 1. The rental property was purchased on September 1, 2015, for $150,000 and was being depreciated over a 27.5-year MACRS life using the straight-line method. At the date of sale, the adjusted basis was $124,783.
   
5. Lorenzo's personal yacht was stolen on September 5. The yacht had been purchased in August at a cost of $25,000. The fair market value immediately preceding the theft was $19,600. Lorenzo was insured for 50% of the original cost, and he received $12,500 on December 1.
   
6. Lorenzo sold a Buick on May 1 for $9,600. The vehicle had been used exclusively for personal purposes. It was purchased on September 1, 2014, for $20,800.
   
7. Lorenzo's trampoline stretching machine (owned two years) was stolen on May 5, but the business's insurance company will not pay any of the machine's value because Larry failed to pay the insurance premium. The machine had a fair market value of $8,000 and an adjusted basis of $6,000 at the time of theft.
   
8. Lorenzo had AGI of $102,000 from sources other than those described above.
   
9. Lorenzo has no non-recaptured § 1231 lookback losses.

For each transaction, what are the amount and nature of recognized gain or loss?

What is Lorenzo's 2019 Adjusted Gross Income?

Answer 1

§ 1231 gain/loss - § 1231 gain/loss is gain or loss on sale or other modes of disposition of depreciable assets and land used for trade and business for more than one year.

Amount and nature of recognized gain or loss for each transaction are as follows:

a. "Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had an allocable basis of $40,000."

§ 1231 loss = $40,000 - $15,000 = $25,000

b. "A truck used to deliver trampolines was sold on January 2 for $3,500. The truck was purchased on January 2, 2014, for $6,000. On the date of sale, the adjusted basis was zero."

Gain = $3,500 - 0 = $3,500

c. "Lorenzo sold an antique rowing machine at an auction. Net proceeds were $4,900. The rowing machine was purchased as used equipment 17 years ago for $5,200 and is fully depreciated."

As the machine is fully depreciated, adjusted basis on the date of sale is zero.

Gain = $4,900 - 0 = $4,900

d. "Lorenzo sold an apartment building for $300,000 on September 1. The rental property was purchased on September 1, 2015, for $150,000 and was being depreciated over a 27.5-year MACRS life using the straight-line method. At the date of sale, the adjusted basis was $124,783."

Overall gain = $300,000 - $124,783 = $175,217

Unrecaptured Section 1250 gain = Purchase Price - Adjusted Basis = $150,000 - $124,783 = $25,217

Regular long-term capital gain = Overall gain - Uncaptured section 1250 gain = $175,217 - $25,217 = $150,000

e. "Lorenzo's personal yacht was stolen on September 5. The yacht had been purchased in August at a cost of $25,000. The fair market value immediately preceding the theft was $19,600. Lorenzo was insured for 50% of the original cost, and he received $12,500 on December 1."

Tax loss = Fair market value - Amount received from insurance = $19,600 - $12,500 = $7,100

There is a tax loss of $7,100 ( before any AGI limitation), that is deducted as personal casualty loss.

f. "Lorenzo sold a Buick on May 1 for $9,600. The vehicle had been used exclusively for personal purposes. It was purchased on September 1, 2014, for $20,800."

Loss = $20,800 - $9,600 = $11,200

This loss of $11,200 is treated as non-deductible personal loss.

g. "Lorenzo's trampoline stretching machine (owned two years) was stolen on May 5, but the business's insurance company will not pay any of the machine's value because Larry failed to pay the insurance premium. The machine had a fair market value of $8,000 and an adjusted basis of $6,000 at the time of theft."

Tax Loss = Adjusted basis or fair market value whichever is lower = $6,000

There is a tax loss of $6,000 which is treated as business casualty loss.

Lorenzo's 2019 Adjusted Gross Income

§ 1231 loss of $25,000 can be set off from uncaptured gain of $25,217.

Adjusted Gross Income for 2019 = $102,000 + $3,500 + $4,900 + $150,000 - $6,000 = $254,400

Personal casualty loss is not allowed as deduction in 2019 unless it occurs due to federal disaster. Uncaptured gain $217($25,217 - $25,000) is taxed separately at a maximum tax rate of 25%. Also, personal loss is not deductible.