A taxpayer sells §1245 property (machine) on the installment method. Sale Price: $100,000. Basis: $60,000. Depreciation Recapture (Ordinary): $20,000. §1231 Gain: $20,000. Cash received in Year 1: $10,000. How is the gain reported in Year 1?

Answer options:

$4,000 gain (mixed character).

$20,000 ordinary income immediately; $2,000 §1231 gain.

$22,000 ordinary income.

$10,000 ordinary income.

How to approach this question

Installment Sale Trap: Depreciation Recapture is NOT eligible for installment deferral. It is taxed 100% in the year of sale. Only the §1231/Capital gain portion is deferred.

Full Answer

B.$20,000 ordinary income immediately; $2,000 §1231 gain.✓ Correct

$20,000 ordinary income immediately; $2,000 §1231 gain.

IRC §453(i). Any depreciation recapture income must be recognized in the year of disposition, regardless of payments received. The recapture amount is added to the basis for calculating the gross profit ratio for the remaining gain.

Common mistakes

Applying the gross profit percentage to the total gain including recapture.

Question 40 All questions Question 42

Practice the full CPA TCP Practice Exam 2

68 questions · hints · full answers · grading

More questions from this exam

Q01In Year 1, an executive receives an Incentive Stock Option (ISO) to purchase 1,000 shares of stoc...Medium Q02A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed ...Medium Q03On January 1, Year 1, a corporation lends $500,000 to a shareholder at a 0% interest rate. The Ap...Hard Q04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. In Year 1, they ear...Medium Q05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. The standard de...Medium

View all 68 questions →