During 2014, Paul sells residential rental property for $300,000, which he acqui

Question

During 2014, Paul sells residential rental property for $300,000, which he acquired in 1994 for $150,000. Paul has claimed straight-line depreciation on the building of $57,525. What is the amount and nature of Paul's gain on the sale of the rental property? a. $207,525 Section 1231 gain. b. $150,000 Section 1231 gain, $57,525 "unrecaptured depreciation". c. $167,400 Section 1231 gain, $57,525 ordinary income. d. $190,125 Section 1231 gain, $17,400 "unrecaptured depreciation". e. None of these choices are correct.

Explanation / Answer

b. $150,000 Section 1231 gain, $57,525 "unrecaptured depreciation"

Note :

1231 property includes depreciable property and real property (e.g. buildings and equipment) used in a trade or business and held for more than one year. Some types of livestock, coal, timber and domestic iron ore are also included.

Book Value at the time of sale = 150000-57525 = 92475

Gain on sale = Sale Value - Book Value

Gain on sale = 300000- 92475

Gain on sale = $ 207525

Section 1250 unrecaptured depreciation = Gain on Sale to the extent of depreciation

Section 1250 unrecaptured depreciation= 207525 subject to $ 57,525

Section 1250 unrecaptured depreciation = $ 57,525

Section 1231 gain = Gain on sale - Ordinary Income

Section 1231 gain = 207525 - 57525

Section 1231 gain = $ 150,000

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