A taxpayer sold a rental property for $500,000. The property was acquired for $400,000. Total depreciation taken was $100,000. What is the character of the gain?

Answer options:

$200,000 Capital Gain

$100,000 Unrecaptured Section 1250 Gain and $100,000 Section 1231 Gain

$100,000 Ordinary Income and $100,000 Section 1231 Gain

$200,000 Ordinary Income

How to approach this question

Real Property Gain: Gain up to amount of depreciation = Unrecaptured 1250 (25% rate). Excess = 1231 Gain (LTCG).

Full Answer

B.$100,000 Unrecaptured Section 1250 Gain and $100,000 Section 1231 Gain✓ Correct

For depreciable real property held > 1 year, gain attributable to straight-line depreciation is 'Unrecaptured Section 1250 Gain' taxed at a max of 25%. Any remaining gain is Section 1231 gain (treated as LTCG).

Common mistakes

Treating real estate depreciation recapture as Ordinary Income (Section 1245 rule) instead of Unrecaptured 1250.

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