Question

Required information [The 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. b. In addition to the original facts, assume that Tonya reports the following nonrecaptured net $1231 loss: Net $1231 Gains/(Losses) $(200,000) Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 (current year) Required: b1. What amount of gain or loss does Tonya recognize on the sale? b2. What is the character of the gain or loss? b3. What effect does the gain or loss have on her year 6 (the current year) tax liability or (tax savings)?

The answer is not $217,500.00

Answer 1

Townhouse 1,000,000 Land 1,000,000 2 b1 3 Caption 4 Sale Price Less : 5 Cost 6 Gain 350,000 650,000 500,000 500,000 8 Note: 9 Cost for townhouse would be cost less the depreciation claimed on the asset. 10 11 b1 The amount of gain would be 1,150,000. 12 b2 13 b3 As the time period is not specifed, we assume that it has been held for more than a year, so it amounts to long term capital gain. The loss would be 201,231 at the sixth year, after summation of the amounts mentioned in the question.