Question

Print Item Exercise 3-23 (Algorithmic) (LO. 1) Aqus Corporation purchases nonresidential real property on May 8, 2015, for $1,610,000. Straight-line cost recovery is taken in the amount of $161,000 before the property is sold on November 30, 2018, for $2,415,000. 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 5 1250 recapture due to 291 6 1231 gain §12SO recapture due to § 291: 6 8 9 Alt Ctri

Answer 1

A) answer = $966000

Explanation;

Section 1250 property consists of real property that is not Section 1245 property, generally buildings and their structural components. When Section 1250 property is sold there is a possibility of Section 1250 depreciation recapture.

The gain is computed as follow:

$2415000 (amount realised) - $1449000 (adjusted basis) ($1610000 - $161000) = $966000 gain realised

B)

S1231 gain = $933800

S1250 recapture due to S291 = $32200

Explanation:

Step 1) determine the gain realized in part a) which was $966000

Step 2) determine the S1245 recapture potential. This is the lessor of $966000 (gain realized)and $161000, which is the straight line depreciation taken.

Step 3) determine the S1250 recapture amount. Cost recovery $161000 - straight line cost recovery $161000 = S1250 ordinary income is $0

Step 4) because the taxpayer is a corporation. Determine the addition S291 amount

S1245 recapture potential	$161000
Less: S1250 recapture amount	$0
Excess S1245 recapture potential	$161000
Apply S291 percentage	× 20%
Additional ordinary income under S291	$32200

As a result total gain of $966000 is recognized as follow:

S1250 gain of $0 which is treated as ordinary income

S291 gain of $32200 which is treated as ordinary income

S1231 gain of $933800

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