Question

During the current year, a taxpayer sells equipment for $150.000 that was placed in service in 2012. The equipment cost $175,000, and $55,000 of depreciation deductions were taken. The results of the sale are: OLTCG of $30,000 Sec. 1245 ordinary income of S30,000 Sec. 1250 ordinary income of $30,000 None of the above

Answer 1

The cost of the equipment is $ 175,000, and depreciation charged is $ 55,000.The adjusted tax basis $ 175,000 minus $55,000 equals to $120,000. Now the equipment is sold for $150,000. The gain is sale price less adjusted tax basis

=$150,000 - $ 120,000 = $ 30,000

So $ 30,000 is subject of section 1245 gain taxed at ordinary income rates. So the correct option would be to - ( section 1245 ordinary income of $ 30,000).

The gain upto the amount of depreciation is subject of ordinary income ( in our case $55,000 is greater than $ 55,000) and gains above that are taxed on section 1231 gains.

Section 1250 are subject to real properties like building and other structural property, this rule is not applicable on equipment. Our case is subject of section 1245 not LTCG .