A business sells a machine for $50,000. The machine was purchased for $40,000 and had accumulated depreciation of $15,000 (Adjusted Basis = $25,000). What is the character of the gain?

Answer options:

$25,000 ordinary income.

$25,000 §1231 capital gain.

$15,000 ordinary income; $10,000 §1231 capital gain.

$10,000 ordinary income; $15,000 §1231 capital gain.

How to approach this question

1. Calculate Total Gain ($25k). 2. Identify Depreciation Taken ($15k). 3. Ordinary Income = Lesser of Total Gain or Depreciation ($15k). 4. Remainder is §1231 Gain ($10k).

Full Answer

C.$15,000 ordinary income; $10,000 §1231 capital gain.✓ Correct

$15,000 ordinary income; $10,000 §1231 capital gain.

IRC §1245 requires that gain on personal property be treated as ordinary income to the extent of depreciation allowed or allowable. Gain ($25,000) up to depreciation ($15,000) is ordinary. The excess ($10,000) is §1231 gain (which may be capital).

Common mistakes

Treating the entire gain as §1231 or limiting recapture to the gain amount incorrectly.

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