Question

Ken sold a rental property for $860,000. He received $128,000 in the current year and $183,000 each year for the next four years. Of the sales price, $582,500 was allocated to the building and the remaining $277,500 was allocated to the land. Ken purchased the property several years ago for $660,000. When he initially purchased the property, he allocated $570,000 of the purchase price to the building and $90,000 to the land. Ken has claimed $15,000 of depreciation deductions over the years against the building. Ken had no other sales of §1231 or capital assets in the current year.

B. For the current year, determine the character of the gain or loss and calculate Ken’s total tax due because of the sale (assuming his marginal ordinary tax rate is 32 percent).

	Character Amount Tax Unrecaptured §1250 (§1231 gain) $15,000 $3,750 Other §1231 gain Tax

Answer 1

Solution: - Page 1 As per the data - Ken sold a dentat Property for $860, 000. He received $126,000 in the current year and $183,000 each... an » The sale of rental property qualifies СЯ installment sale. As result, in the year of sale ken has a §1231 gain of $15,000 taxed at a maximum 25% rate. He also has a $1231 gain of $17,000 taxed at a maximum 15% rate. In the year of the sale, ken's tax liability is $6,300 2) The unrecaptured § 1250 gain is recognized before any (as indicated by the regulations). The gain is tasted in subsequent years. The computation for the current year is as follow of the § 1231 gain remaining

Page 2 Description Amount Explanation Amount realized 360.000 Given Adjusted Basis 645,000 - $660,000 - $15,000 Gain Realized 215,000 -$860,000 - $645,000 GÖOSS poof it 1 25% - $215,000/ 860,000 X 100 Payment received 128,000 Given in year o Gain/loss ($128,000 825% 32,000 recognized in yearo i, out of $32,000, $15,000 of unde captured 81250 and $17,000 & 1231 gain Tax (5) character Amocent ($) Rate unrecaptused $1250 ($1231 gain) 15,000 2546 3.750 other § 1231 gain 17,000 15% 2,550 Tax 16,300