Question

Problem 3-52 (LO 3-5) [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. Problem 3-52 Part-b 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)

Answer 1

The answer for this question along with appropriate explanations has been uploaded with the help of images below :

a Tonya has a $1231 gain of $250,000 taxed at a maximum 25% rate. She also has a $1231 gain of $900,000 ($400,000 from the building and $500,000 from the land) taxed at a maximum 1596 rate. Tonya's tax liability is $197,500, calculated as follows: Description of Building Sale Amount Explanation (1) Amount Realized $1,000,000 Given (2) Original Basis 600,000 Given (3) Accumulated Depreciation (250,000) Given (4) Adjusted Basis 350,000 12+ (3) (5) Gain/(Loss) Recognized 650,000 (1)-(4) (6) Unrecaptured $1250 gain $250,000 Lesser of (5) or (3) (7) Remaining $1231 gain $400,000 (5)-(6) Total $1231 gain $650,000 (6) + (7) Description of Land Sale Amount Explanation (1) Amount Realized S1,000,000 Given (2) Original Basis 500,000 Given

(3) Accumulated Depreciation (0) Given (4) Adjusted Basis 500,000 (21+ (3) (5) $1231 Gain/(Loss) Recognized 500,000 (1)-(4) Character Amount Rate Tax Unrecaptured $1250 ($1231 gain) | $250,000 259 562,500 Other $1231 gain $900,000 159 $135,000 Tax S197,500 b. Tonya has an ordinary gain of $200,000, due to the $1231 look back rule. Tonya has a $1231 gain of 550,000 taxed at a maximum 2596 rate (the other $200,000 was recaptured as ordinary since it was the also has a $1231 gain of $900,000 ($400,000 from the building and $500,000 from the land) taxed at a maximum 15% rate. Tonya's tax liability is $217,500, calculated as follows: Description of Building Sale Amount Explanation (1) Amount Realized $1,000,000 Given

(2) Original Basis 600,000 Given (3) Accumulated Depreciation (250,000) Given (4) Adjusted Basis 350,000 (21+ (3) (5) Gain/(Loss) Recognized 650,000 (1) -(4) (6) Unrecaptured $1250 gain $250,000 Lesser of (5) or (3) (7) Remaining $1231 gain $400,000 (5) -(6) Total $1231 gain $650,000 (6) + (7) Description of Land Sale Amount Explanation (1) Amount Realized $1,000,000 Given (2) Original Basis 500,000 Given (3) Accumulated Depreciation (0) Given (4) Adjusted Basis 500,000 (2)+(3) (5) $1231 Gain/(Loss) Recognized 500,000 (1)-(4)

Year Net Recaptured Notes Ordinary LTCG $1231 gain (loss) Nonrecaptured $1231 losses Year 1 (S200,000) So Loss is ordinary ($200,000) ($200,000) Nonrecaptured losses Year 2 ($200,000) Nonrecaptured losses Year 3 so ($200,000) Nonrecaptured losses Year (S200,000) Nonrecaptured losses Year 5 (S200,000) Nonrecaptured losses

Year $200,000 $200,000 Ordinary $200,000 $250,000 (2596) $900,000 (1596) $50,000 $900,000 SO Nonrecaptured losses Character Amount Rate Tax Ordinary $200,000 35% $70,000 Unrecaptured $1250 ($1231 gain) $50,000 259 $12,500 Other $1231 gain $900,000 15% $135,000 Tax $217,500