Question

In Year 5 Naxos Inc., a C corporation, sold Section 1250 property for $400,000 that had an adjusted basis of $250,000, resulting in a gain of $150,000. The original cost of the property, which Naxos had purchased in Year 1, was $350,000 and $100,000 of total depreciation had been taken on the property. Had straight-line depreciation been used, depreciation would have been $60,000. How should Naxos report the gain on its Year 5 tax return? Multiple Choice $150,000 ordinary gain 0 $48,000 ordinary gain and $102,000 long-term capital gain $52,000 ordinary gain and $98,000 long-term capital gain $40,000 ordinary gain and $110,000 long-term capital gain

Answer 1

Solution

Original Cost of the asset = $ 350,000

Less accumulated Depreciation = $ 100,000

Adjusted Basis = $ 250,000

Sale Price = $ 400,000

So Gain will be Sale price minus Adjusted Basis = 400,000-250,000

  = $ 150,000

When comparing the gain on sale of the asset with accumulated Depreciation, if the accumulated depreciation is more than the gain on sales, the entire accumulated depreciation will be considered for Depreciation re capture.

Here the gain is $ 150,000, but the accumulated depreciation is only $ 100,000, the entire accumulated depreciation of $ 100,000 will be re captured and the same will be treated as ordinary income. The balance amount of $ 50,000 is treated as capital gain and is taxed at the favorable capital gain rate.

So the answer is $ 100,000 Ordinary income and $ 50,000 capital gain