A taxpayer sells an office building (Section 1250 property) for $600,000. Original cost $500,000. Straight-line depreciation taken $100,000. Adjusted basis $400,000. The taxpayer is an individual in the 37% bracket. What is the tax treatment of the $200,000 gain?

Answer options:

$200,000 at 37% (Ordinary)

$100,000 at 25% (Unrecaptured 1250); $100,000 at 20% (1231 Capital)

$200,000 at 20% (Capital)

$100,000 Ordinary; $100,000 Capital

How to approach this question

Real Property Sale: 1. Depreciation taken = Unrecaptured 1250 Gain (Max 25%). 2. Excess Gain = 1231 Capital Gain (Max 20%).

Full Answer

B.$100,000 at 25% (Unrecaptured 1250); $100,000 at 20% (1231 Capital)✓ Correct

IRC §1(h). Gain = $200,000. <br/>Depreciation taken = $100,000. This portion is Unrecaptured §1250 gain, taxed at max 25%. <br/>Remaining Gain = $100,000. This is §1231 gain (LTCG), taxed at max 20%.

Common mistakes

Treating the depreciation portion as ordinary income (§1245 style).

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