Individual taxpayer sells an office building (held > 1 year) for $500,000. Original cost $400,000. Accumulated straight-line depreciation $100,000. Adjusted Basis $300,000. Total Gain $200,000. How is the gain taxed?

Answer options:

$200,000 at 15%/20% Capital Gain rates.

$100,000 Ordinary, $100,000 Capital Gain.

$100,000 Unrecaptured §1250 Gain (max 25%), $100,000 §1231 Gain (15%/20%).

$200,000 Ordinary Income.

How to approach this question

Real Property (Straight Line): No ordinary recapture. Gain due to depreciation ($100k) is 'Unrecaptured §1250 Gain' taxed at max 25%. Remaining gain ($100k) is §1231 Capital Gain.

Full Answer

C.$100,000 Unrecaptured §1250 Gain (max 25%), $100,000 §1231 Gain (15%/20%).✓ Correct

IRC §1(h). Gain attributable to straight-line depreciation on real property is Unrecaptured §1250 gain (max 25%). Gain above original cost is regular §1231 capital gain.

Common mistakes

Confusing §1245 recapture (ordinary) with §1250 unrecaptured gain (25%).

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