A taxpayer sells a rental property for $500,000. The property was purchased for $400,000. The taxpayer claimed $100,000 of depreciation deductions (straight-line) during the holding period. What is the character of the gain?

Answer options:

$200,000 Capital Gain (0/15/20%).

$200,000 Ordinary Income.

$100,000 Unrecaptured Section 1250 Gain (max 25%) and $100,000 Section 1231 Gain (Capital).

$100,000 Ordinary Income and $100,000 Capital Gain.

How to approach this question

Real Property Sale: Gain up to amount of Straight-Line Depreciation taken = Unrecaptured §1250 Gain (Taxed at max 25%). Remaining Gain = §1231 Gain (LTCG rates).

Full Answer

C.$100,000 Unrecaptured Section 1250 Gain (max 25%) and $100,000 Section 1231 Gain (Capital).✓ Correct

Total Gain = $500k - ($400k - $100k) = $200k. The portion of the gain attributable to straight-line depreciation ($100,000) is Unrecaptured Section 1250 Gain, taxed at a maximum rate of 25%. The remaining gain ($100,000) is Section 1231 gain (treated as LTCG).

Common mistakes

Treating real property depreciation recapture as Ordinary Income (like §1245).

Question 71 All questions

Practice the full CPA REG Practice Exam 4

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