Question

Bob owns a farming sole proprietorship. During the year, Bob sold a milk cow that he had owned for 15 months and a workhorse that he had owned for 66 months. The cow had an adjusted basis of $38,000 and was sold for $55,000. The horse had an adjusted basis of $750 and was sold for $4,000. Bob also has a $200 long-term capital loss from the sale of corporate stock. He has $55,000 of other AGI (not associated with the items above) for the year. He has $4,000 nonrecaptured § 1231 losses from the previous five years.

The sale of the milk cow results in an ordinary gain of $ _______. Although the sale of the workhorse results in a § 1231 gain of $______, due to the § 1231 lookback rule , the amount is reclassified as ordinary gain . Therefore, Bob's AGI for the year is $________.

Answer 1

Solution:-

The sale of the milk cow results in an ordinary gain of $17,000. Although the sale of the workhorse results in a § 1231 gain of $3,250, due to the § 1231 lookback rule , the amount is reclassified as ordinary gain . Therefore, Bob's AGI for the year is $75,050.

Explanation:-

Cattle and horses must be held 24 months or more to qualify as § 1231 assets. Since the cow was held only 15 months, it is an ordinary asset and the $17,000 gain ($55,000 sales price – $38,000 adjusted basis) is an ordinary gain.

The workhorse was held 66 months, so it is a § 1231 asset. The $3,250 gain ($4,000 sales price – $750 adjusted basis) is a § 1231 gain. Since there is only a § 1231 gain for the year, the net § 1231 gain is $3,250 and that gain is treated as an ordinary gain because the $4,000 of prior non recaptured losses causes application of the § 1231 look back rule. None of the $3,250 net § 1231 gain is treated as a long-term capital gain; so the $200 long-term capital gain is included in AGI.

§1231 gain from horse sale (ordinary gain)	3,250
Long-term capital loss from corporate stock sale	(200)
Ordinary gain from sale of milk cow	17,000
Other adjusted gross income	55,000
Adjusted gross income	75,050