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-a Required: a1. What amount of gain or loss does Tonya recognize on the sale? a2. What is the character of the gain or loss? a3. What effect does the gain or loss have on her tax liability or (tax savings)? Complete this question by entering your answers in the tabs below. Req ai Req a2 Req a3 What effect does the gain or loss have on her tax liability or (tax savings)? Tax liability by C Req a2 Req a3 >

Please answer Req a3

Answer 1

) Amount of gain recognized on the sale of townhouse and land = $650,000+$500,000 = $1,150,000.

Character of the loss or gain implies that how the gain or loss is treated for the purpose of taxation.According to this, any non-recaptured gain will be treated

as ordinary gain and will be removed from the overall gain and the remaining left over gain will be considered as capital gain and will be taxed accordingly.

Non-recaptured gain of $250,000 will be taxed @ rate of 35%.

Capital gain of $900,000 will be taxed @ rate of 20%.

Tax liability will be ($87,500+$180,000) = $267,500.

b) Tax liability will be ($17,500+$180,000) =$197,500

Explanation:

a) Calculation of gain/(loss) realized on sale of townhouse buy using excel formula:

Now the gain realized on sale of townhouse is $650,000 and accumulated depreciation that can be claimed is $250,000, so the non-recaptured gain will be lessor of both the amounts. That means $250,000.

And the capital gain will be $400,000 ($650,000-$250,000).

Calculation of gain/(loss) realized on sale of land buy using excel formula:

The gain realized on sale of land amounts to $500,000. As the accumulated depreciation to be claimed is 0. There will be no non-recaptured gain. Hence capital gain will be $500,000.

So the overall non-recaptured gain and capital gain will be as follow:

Non-recaptured gain = $250,000

Capital gain ($400,000+$500,000) =$900,000

Tax liability will be as follow:

Non recaptured gain = $250,000*35% = $87,500

Capital gain = $900,000*20% = $180,000

b) T's non-recaptured gain is $250,000 and the non-recaptured loss in 6th year is $200,000.Hence the net non-recaptured income is $50,000

Tax liability will be as follow:

Non recaptured gain = $ 50,000*35% = $17,500

Capital gain = $900,000*20% = $180,000