Ken sold a rental property for $753,000. He received $101,000 in the current yea
ID: 2457212 • Letter: K
Question
Ken sold a rental property for $753,000. He received $101,000 in the current year and $163,000 each year for the next four years. $415,000 of the sales price was allocated to the building and the remaining $338,000 was allocated to the land. Ken purchased the property several years ago for $544,500. When he initially purchased the property, he allocated $402,500 of the purchase price to the building and $142,000 to the land. Ken has claimed $17,400 of depreciation deductions over the years against the building. Ken had no other sales of S1231 or capital assets in the current year. For the current year, determine the amount of Ken's total recognized gain or loss. For the current year, calculate Ken's total tax due because of the sale (assuming his marginal ordinary tax rate is 35 percent).Explanation / Answer
The sale qualifies as an installment sale. As a result, in the year of the sale Ken has a §1231 gain of $17,400 taxed at a maximum 25% rate. He also has a §1231 gain of $12,900 taxed at a maximum 15% rate. In the year of the sale, Ken’s tax liability is $6,285.00. The unrecaptured §1250 gain is recognized before any of the §1231 gain (as indicated by the regulations). The remaining gain is taxed in subsequent years. The computation for the current year is as follows A) 1 Amount Realized 7,53,000 2 Adjusted Basis 5,27,100 3 Gain Realized 2,25,900 2-1 4 Gross Profit Percentage 30% 3/1 5 Payment received in current year 1,01,000 6 Gain recongnized in current year 30,300 5*4 Unrecaptured Gain §1250 17,400 Other §1231 gain 12,900 30,300 B) Amount Rate Tax Unrecaptured Gain §1250 17,400 25% 4,350 Other §1231 gain 12,900 15% 1,935 6,285
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