Question

In year 0, Longworth Partnership purchased a machine for $40,000 to use in its business. In year 3, Longworth sold the machine for $35,000. Between the date of the purchase and the date of the sale, Longworth depreciated the machine by $22,000. (Loss amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.) a. What is the amount and character of the gain or loss Longworth will recognize on the sale? Help!!

Answer 1

Solution:

Amount realized = $35,000

Original basis = $40,000

Accumulated depreciation = $22,000

Adjusted basis = $40,000 - $22,000 = $18,000

Gain recognized = $35,000 - $18,000 = $17,000

Ordinary income (Section 1245 depreciation recapture) = $17,000

Because the entire gain is caused by depreciation deductions, the entire gain is treated as ordinary income under §1245.