Question

Aqua Corporation purchases nonresidential real property on May 8, 2016, for $1,320,000. Straight-line cost recovery is taken in the amount of $132,000 before the property is sold on November 27, 2019, for $1,980,000.

a. Compute the amount of Aqua's recognized gain on the sale of the realty. $____

b. Determine the amount of the recognized gain that is treated as § 1231 gain and the amount that is treated as § 1250 recapture due to § 291. § 1231 gain: $____

§ 1250 recapture due to § 291: $____

Answer 1

Aqua Corporation Requirement a That property used for trade or business is classified as a Section 1231 property. If that property happens to be real property used in a trade or business, then Section 1250 depreciation recapture rules apply to it. Basis: $1,320,000 Straight-line depreciation taken: 132,000 Adjusted basis: $1,188,000 Amount Realized from Sale: $1,980,000 Gain Recognized: $1,980,000 - $1,188,000 = $792,000 Requirement b Aqua Corporation has $ 1231 gain of $765,600 and $ 1250 recapture (ordinary income) due to $ 291 of $26,400 computed as follows: First, determine the recognized gain from part (a) above: $1,980,000 amount realized - $1,188,000 adjusted basis ($1,320,000-$132,000 accumulated depreciation) = $792,000 recognized gain. The next steps determine how the gain is recognized due to Sections 1245, 1250 and 291. Second, determine the $ 1245 recapture potential: This is the lesser of $792,000 (recognized gain) or $132,000, which is the straight-line depreciation taken. Third, determine the $ 1250 recapture amount: Cost recovery $132,000 - straight-line cost recovery ($132,000) = $ 1250 ordinary income $0 Fourth, because the taxpayer is a corporation, determine the additional $ 291 amount: 132000 $ 1245 recapture potential: Less $ 1250 recapture amount: Excess $ 1245 recapture potential: Apply $ 291 percentage: Additional ordinary income under $291: 132000 20% 26400 As result the total gain of $792,000 is recognized as follows: $ 1250 gain of $0 which is treated as ordinary income. $ 291 gain of $26,400 which is treated as ordinary income. $ 1231 gain of $7,65,600 ($792,000 - $0 - $26,400)