ExpertHard1 markMultiple Choice
CPA · Question 29 · Area IV: Property Transactions
A taxpayer sells an office building (real property) for $500,000. Original cost was $400,000. Accumulated straight-line depreciation is $100,000. Adjusted basis is $300,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. What is the tax treatment of the $200,000 gain?
A taxpayer sells an office building (real property) for $500,000. Original cost was $400,000. Accumulated straight-line depreciation is $100,000. Adjusted basis is $300,000. The taxpayer is in the 37% ordinary bracket and 20% capital gains bracket. What is the tax treatment of the $200,000 gain?
Answer options:
A.
$200,000 taxed at 20%.
B.
$100,000 taxed at 25% (Unrecaptured §1250); $100,000 taxed at 20% (§1231).
C.
$100,000 taxed at 37% (Ordinary); $100,000 taxed at 20%.
D.
$200,000 taxed at 37%.
How to approach this question
Real Property: 1. Gain up to Accum Depr = Unrecaptured §1250 (Max 25%). 2. Excess Gain = §1231 Capital Gain (Max 20%). Note: If accelerated depreciation was used, §1250 ordinary recapture might apply, but question specifies straight-line.
Full Answer
B.$100,000 taxed at 25% (Unrecaptured §1250); $100,000 taxed at 20% (§1231).✓ Correct
B
IRC §1(h) and §1250. Gain = $200,000. Depreciation taken = $100,000. The portion of gain attributable to straight-line depreciation ($100,000) is Unrecaptured §1250 gain, taxed at a max of 25%. The remaining $100,000 is pure §1231 capital gain.
Common mistakes
Treating real property depreciation as ordinary income (§1245 style); applying 20% rate to the whole gain.
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