A taxpayer sold a building used in their business for $500,000. The building was purchased for $400,000. Total depreciation taken was $100,000 (straight-line). What is the amount and character of the gain?

Answer options:

$200,000 capital gain

$100,000 ordinary income and $100,000 capital gain

$200,000 ordinary income

$100,000 unrecaptured §1250 gain and $100,000 §1231 gain

How to approach this question

Calculate Adjusted Basis ($400k - $100k = $300k). Gain = $500k - $300k = $200k. Split gain: Depreciation portion ($100k) is Unrecaptured §1250. Excess ($100k) is §1231.

Full Answer

D.$100,000 unrecaptured §1250 gain and $100,000 §1231 gain✓ Correct

Adjusted Basis = $400,000 - $100,000 = $300,000. Realized Gain = $500,000 - $300,000 = $200,000. For real property (Section 1250) depreciated straight-line, there is no ordinary income recapture (unlike §1245). However, the gain attributable to depreciation claimed ($100,000) is 'Unrecaptured Section 1250 Gain' (taxed at max 25%). The remaining gain ($100,000) is pure Section 1231 gain (long-term capital gain rates).

Common mistakes

Applying §1245 recapture rules (ordinary income) to real property.

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