ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area IV: Property Transactions
A taxpayer sells a machine used in business for $50,000. The machine was purchased for $60,000 and has accumulated depreciation of $25,000. What is the amount and character of the gain or loss?
A taxpayer sells a machine used in business for $50,000. The machine was purchased for $60,000 and has accumulated depreciation of $25,000. What is the amount and character of the gain or loss?
Answer options:
A.
$15,000 §1231 Capital Gain
B.
$10,000 Ordinary Loss
C.
$15,000 Ordinary Income
D.
$15,000 Capital Gain
How to approach this question
1. Calculate Gain. 2. Compare Gain to Accumulated Depreciation. 3. Lesser of Gain or Depreciation is Ordinary (§1245). 4. Excess is §1231.
Full Answer
C.$15,000 Ordinary Income✓ Correct
C
IRC §1245. Adjusted Basis = $35,000. Gain = $15,000. Accumulated Depreciation = $25,000. Since the gain is less than the depreciation taken, the entire $15,000 is recaptured as ordinary income.
Common mistakes
Treating it as §1231 gain; miscalculating basis.
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