Question 1

The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

Accepted Answer

This is true according to the tax code. The recapture amount can never exceed the realized gain.

Question 2

When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

Accepted Answer

When corporate and noncorporate taxpayers sell real property placed in service after 1986, some of the depreciation will be taxed at a maximum rate of 25%, but the rest will be taxed at the ordinary income tax rate. The amount taxed at 25% depends on the depreciation method used and the tax bracket of the taxpayer.

Question 3

On June 1, 2013, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2016, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo's gain?

Accepted Answer

The answer of On June 1, 2013, Buffalo Corporation purchased...

Question 4

For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

Accepted Answer

Noncorporate taxpayers are not subject to depreciation recapture on real property placed in service after 1986. This is because noncorporate taxpayers are generally not subject to the corporate tax rules that require depreciation recapture.

Question 5

A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) all of the above.

Accepted Answer

- If the building is fully depreciated, there is no more depreciation to recapture.
- If the building was placed in service after 1986, it is subject to the Modified Accelerated Cost Recovery System (MACRS) which does not trigger depreciation recapture under Sec.1250.
- Straight-line depreciation is the default depreciation method under MACRS, and it also does not trigger depreciation recapture under Sec.1250.

Question 6

In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.

Accepted Answer

Mr. Lyle must report two types of gain - ordinary gain on the amount of depreciation taken (i.e. $470,000) and Sec. 1231 gain on the difference between the sale price and adjusted basis (i.e. $580,000 - $10,000 [adjusted basis after depreciation] = $570,000). Therefore, the correct answer is C - $70,000 of ordinary income and $500,000 of Sec. 1231 gain.

Question 7

Eric purchased a building in 2005 that he uses in his business. Eric uses the straight-line method for the building. Eric's original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are
A) $260,000 Sec. 1231 gain, all taxable at 20%.
B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.

Accepted Answer

Since Eric is in the top tax bracket and has never sold any other business assets, the cost-recovery deductions are recaptured at a rate of 25%. 
The building is sold for $560,000, which is more than the original cost of $420,000. Therefore, there is a gain that is classified as Section 1231 gain. 
However, since cost-recovery deductions were taken using the straight-line method, a portion of the gain is classified as unrecaptured Section 1250 gain and is taxed at 25% while the remaining balance is taxed at 20%. 
The unrecaptured Section 1250 gain is $120,000, and the remaining balance is $140,000. Therefore, the tax result is a Section 1231 gain of $260,000, of which $120,000 is unrecaptured Section 1250 gain taxable at 25% and the remaining balance of $140,000 is taxable at 20%.

Question 8

With respect to residential rental property
A) 80% or more of the gross rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
B) hotels are not included in this category if less than half of the units are used on a transient basis.
C) 80% or more of the net rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
D) gain is not subject to the depreciation recapture provisions if the property is held more than one year.

Accepted Answer

According to the IRS, residential rental property must have 80% or more of its gross rental income coming from dwelling units in order to be classified as such.

Question 9

Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

Accepted Answer

Unrecaptured 1250 gain is a real estate tax concept that refers to the portion of a capital gain that comes from the sale of depreciable real estate. It is taxed at a lower rate than ordinary income but higher than other long-term capital gains. If Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation, then the unrecaptured 1250 gain would be taxed as ordinary income.

Question 10

Emily, whose tax rate is 28%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are
A) $74,000 1231 gain taxed at 15%.
B) $74,000 ordinary income taxed at 28%.
C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231 gain taxed at 15%.
D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income taxed at 28%.

Accepted Answer

B)The gain realized is $950,000 - $876,000 = $74,000.The gain is neither Sec.1231 gain nor Sec.1250 gain because the holding period is not more than one year.Thus,the gain is taxed at ordinary income rates,in this case,28%.

Question 11

Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is
A) $750,000 Sec. 1231 gain.
B) $150,000 Sec. 1231 gain and $600,000 ordinary income.
C) $750,000 ordinary gain due to Sec 1245.
D) $750,000 ordinary gain due to Sec. 1250.

Accepted Answer

The answer of Marta purchased residential rental property for $600,000...

Question 12

A business plans to sell its office building which it acquired and placed in service in 1995. Sec. 1250 requires a portion of gain realized on the sale of a buildings used in a business and depreciated under MACRS to be recaptured as ordinary gain.

Accepted Answer

The answer of A business plans to sell its office...

Question 13

An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for Building No. 1 and the accelerated method (ACRS) was used for Building No. 2. Information about those buildings is presented below.
 $\begin{array}{lcc}
&\text { Building No. } 1&\text { Building No. } 2\
\text { Date acquired } & 1984 & 1984 \
\text { Cost } & \$ 510,000 & \$ 650,000
\end{array}$
 Accum. Depreciation
 $\begin{array}{ll}
\text { Straight-line } & 510,000 \
\text { ACRS depreciation } &&650,000 \
\text { Selling Price } & 750,000&825,000
\end{array}$
 How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture?

Accepted Answer

The answer of An unincorporated business sold two warehouses during...

Question 14

What is the purpose of Sec. 1245 and what is its significance?

Accepted Answer

The answer of What is the purpose of Sec. 1245...

Question 15

With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except
A) Sec. 1250 affects the character of the gain, not the amount of the gain.
B) Sec. 1250 applies to assets sold or exchanged at either a gain or a loss.
C) Sec. 1250 ordinary income does not exist if the straight-line method of depreciation is used.
D) Sec. 1250 ordinary income is never more than the additional depreciation allowed.

Accepted Answer

The answer of With regard to noncorporate taxpayers, all of...

Question 16

Jed sells an office building during the current year for $800,000. The building was purchased in 1980 for $350,000. Jed had depreciated the building under an accelerated method, but it is now fully depreciated. Jed has never had any other Sec. 1231 transactions.
a. What is the recognized gain or loss on the sale of the building and the character of the gain?
b. How will the gain be taxed?
c. Assume the building was purchased in 1981 and depreciated under ACRS. How will the gain be taxed?

Accepted Answer

The answer of Jed sells an office building during the...

Question 17

Ross purchased a building in 1985, which he uses in his manufacturing business. Ross uses the ACRS statutory rates to determine the cost-recovery deduction for the building. Ross's original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $340,000, the tax results to Ross are
A) $340,000 LTCG.
B) $340,000 Sec. 1231 gain.
C) $340,000 Sec. 1245 ordinary income.
D) $340,000 Sec. 1250 ordinary income.

Accepted Answer

Since Ross used ACRS to determine the cost-recovery deduction for the building, it falls under Section 1245 property, which is subject to recapture as ordinary income upon sale. The amount recaptured is the lesser of the depreciation claimed or the gain on sale, which in this case is the entire sale price of $340,000. Therefore, Ross will have $340,000 of ordinary income as a result of recapturing the depreciation taken on the building.

Question 18

Network Corporation purchased $200,000 of five-year equipment on March 24, 2015. They elected to expense $60,000 of the cost under Sec. 179 in effect that year. After depreciating the equipment $28,000 in 2015 and $22,400 in 2016, the equipment was sold for $190,000.
a. What is the amount of the realized gain (or loss) on the sale?
b. How is the gain or loss taxed?

Accepted Answer

The answer of Network Corporation purchased $200,000 of five-year equipment...

Question 19

Section 1250 does not apply to assets sold or exchanged at a loss.

Accepted Answer

Section 1250 of the IRS Code only applies to the depreciation recapture of gains, not losses.

Question 20

Alejandro purchased a building in 1985, which he uses in his manufacturing business. Alejandro uses the ACRS statutory rates to determine the cost-recovery deduction for the building. Alejandro's original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $800,000, the tax results to Alejandro are
A) $500,000 Sec. 1245 ordinary income and $300,000 Sec. 1231 gain.
B) $800,000 Sec. 1245 ordinary income.
C) $500,000 Sec. 1245 ordinary income and $300,000 Sec. 1250 income.
D) $800,000 Sec. 1231 gain.

Accepted Answer

A)Section 1245 ordinary income recapture applies to non-residential real estate placed in service after December 31,1980,and before January 1,1987.This property qualifies as such.Gain realized is considered 1245 ordinary income to the extent of all depreciation taken,with any remaining gain treated as Sec.1231 gain.
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Quiz 28: Property Transactions: Section 1231 and Recapture

The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

On June 1, 2013, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2016, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo's gain?

For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if

In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report

With respect to residential rental property

Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

Emily, whose tax rate is 28%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are

A business plans to sell its office building which it acquired and placed in service in 1995. Sec. 1250 requires a portion of gain realized on the sale of a buildings used in a business and depreciated under MACRS to be recaptured as ordinary gain.

What is the purpose of Sec. 1245 and what is its significance?

With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except

Section 1250 does not apply to assets sold or exchanged at a loss.