Question

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 a1 Req a2 Req a3 What is the character of the gain or loss? $250,000 Unrecaptured $1250 and $900,000 other $1231 gain O$900,000 Unrecaptured $1250 and $250,000 other $1231 gain O$1,150,000 Unrecaptured $1250 O $250,000 Unrecaptured $1250 and $900,000 long-term capital gain $900,000 Unrecaptured $1250 and $250,000 long-term capital gain < Req a1 Req a3 >

Please answer Req 2a

Answer 1

Tonya has a 1231 gain in selling both townhouse and land. Unrecaptured 1231 gain are taxed at a maximum rate of 25% and other 1231 gain are taxed at a maximum rate of 15%. Tonya's amount of gain or loss and the character of the gain or loss are shown as follows:

a1. & a2. Calculation of the amount of gain or loss recognised as well as their character

Particulars of Building sale	Amount
1.Amount Realized	$1,000,000	Given
2.Original basis	$600,000	Given
3.Accumulated Depreciation	($250,000)	Given
4.Adjusted Basis	$350,000	(2 + 3)
5. Gain/Loss Recognised	$650,000	(1 - 4)
6. Unrecaptured 1250 gain	$250,000	Lesser of 5 or 3
7. Remaining 1231 gain	$400,000	(5 - 6)
8. Total 1231 gain	$650,000	(6 + 7)

Particulars of Land Sale	Amount
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 Recognised	$500,000	(1 - 2)

Character	Amount
Unrecaptured 1250 (1231 gain)	$250,000
Other 1231 gain	$900,000

Answer is $250,000 Unrecaptured section 1250 and $900,000 other section 1231 gain.