ExpertHard1 markMultiple Choice
CPA · Question 45 · Area IV: Property Transactions
A taxpayer sells a building (Section 1250 property) for a gain of $100,000. They used straight-line depreciation of $40,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. How is the gain taxed?
A taxpayer sells a building (Section 1250 property) for a gain of $100,000. They used straight-line depreciation of $40,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. How is the gain taxed?
Answer options:
A.
$40,000 taxed at 37%; $60,000 taxed at 20%.
B.
$100,000 taxed at 20%.
C.
$40,000 taxed at 25% (Unrecaptured §1250); $60,000 taxed at 20% (LTCG).
D.
$100,000 taxed at 25%.
How to approach this question
Real Property Rule: 1. Depreciation taken (SL) -> Unrecaptured §1250 Gain (Max 25% rate). 2. Excess Gain -> §1231/LTCG (20% rate). Note: If accelerated depreciation was used, that portion would be §1250 Ordinary Recapture.
Full Answer
C.$40,000 taxed at 25% (Unrecaptured §1250); $60,000 taxed at 20% (LTCG).✓ Correct
IRC §1(h). Gain on real property attributable to straight-line depreciation is 'unrecaptured §1250 gain,' taxed at a maximum rate of 25%. The gain in excess of depreciation is regular long-term capital gain (20%).
Common mistakes
Treating SL depreciation recapture as ordinary income (like §1245) or as regular capital gain.
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