Taxpayer sells a machine used in business for $12,000. Original cost was $10,000. Accumulated depreciation was $6,000 (Adjusted Basis $4,000). What is the character of the gain?

Answer options:

$8,000 Capital Gain

$6,000 Ordinary Income, $2,000 §1231 Gain

$8,000 Ordinary Income

$4,000 Ordinary Income, $4,000 §1231 Gain

How to approach this question

Total Gain = $12k - $4k = $8k. §1245 Recapture = Lesser of Gain ($8k) or Depreciation Taken ($6k) -> $6k Ordinary. Remaining Gain ($2k) is §1231.

Full Answer

B.$6,000 Ordinary Income, $2,000 §1231 Gain✓ Correct

IRC §1245. Depreciation recapture converts gain to ordinary income to the extent of depreciation allowed ($6,000). Any gain in excess of original cost ($12,000 - $10,000 = $2,000) is §1231 gain.

Common mistakes

Treating the entire gain as ordinary or capital.

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