Question

Required information 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 51231 loss: Net 51231 Yea Gains/(Losses) Year 1 $200,000) 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 Complete this question by entering your answers in the tabs below.

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Answer: Requirement : Tonya has an ordinary gain of $200000, due to § 1231 look- back role. Tonya has a $1231 gain of $50000 taxed at a maximum 25.1 rate (the other $ 200,000 we recaptured as ordinary since it was the highest rate § 1231 gain of $ 900000 (4400000 from the building & $ 500.000 from the land) taxed at a 151. rate since her marginal ordinary income tax rate is 351.. Tonya's tax liability is $217500, caluated as follows: Amount Explanation Given Given Given particulars: Description of Building sale 1) Amount realized 2) original basis 3) Accomolated Depreciation 4) adjusted basis 5) Gainf (Loss) Recognized 6) onrecaptured & 1250 gain, $ 1 000 000 $ 600000 $(250000) $ 350000 $ 650000 & 250000 (a)+(3) (1)-(4) Lesser of (5) (or) (3) (5)=(6) $ 400000 7) Remaining & 1231 gain Total § 1231 gain & 650000 (6) + (7)

Amount Explanation $ 1 000 000 $ Sooooo Given Description of land sale 1 Amount realized 2) original basis 3) Accemulated depreciation 4) Adjusted basis 5 91231 gain /(Loss) recognized UUUU (2) +13) $ 500000 $ 500 000 (1)-(4) 031 LTCG Notes ordinary * Year Net § 1231 gain/closs) Recaptured] Non recaptured & 1231 losses Loss is ordinary ($200000) $0 ($200000) year ($200000) Non recaptured losses year a year 3 30 $o $0 $0 $0($200000) $0 ($ 200 000) $0 (100000) poct 200 000) $200 000 Non recaproved losses Non recaptured losses Non recaptured losses Non recaptured losses $ 200 000 Ordinary year y years $200000 50000 $900000 $ 250000 (251) $900.000 (151) $0 year 6 10 Non recaptured losses Rate Tax Amount $ 200000 31- 170000 $ 12500 25.12 character ordinary in recaptured of 1250 ($123 other of 1231 gain Tax $ 50000 $ 900.000 151 V $ 135000 $ 217500

Requirement @ : Tonya's nonrecaptured & 1231 loss is about to expire. if she delays the sale of her townhouse until January of year 7 there is no longer any recapture , because nonrecaptured § 1231 losses only carry over for five years. This would leave Tonya with the same result as part a. Tonya has a & 1231 gain of s 250000 tared at a maxinom of 25% rate. She also has a $1231 gain of $900000 ( $400000 from building & $ 50ooou from the land , taxed at a 157 rate. Tonya's Tax liability is $ 197500, which a Savings of $ 20000 for waiting a few weeks to Sell the asset year Net & 1231 Notes ordinary Lice gain / CLOSS) Recaptured / Nonrecaptured $1231 losses fo($200000) ! year! ($200.000) year a Loss is ordinary ($200000) Non recaptured losses Non recaptured losses Non recaptured losses year 3 fo($200000) $ 0(4200000) to $2000co) $0 year 4 losses $0 Non recaptured Nonrecaptured losses years ! yeart & o $ o Nonrecaptured losses only carry over 5 years year of - $250000 (25+) $900.000 (151) $250000 a 900000

* character unrecaptured & 1250 (§ 1231 gain) other of 1230 gain Tax → Amount Date $250000 25.1. $ 900000 15. Tax $62500 $135000 $ 197500