Dontrell sells a building used in his business at a gain of $20,000. The building was purchased in 2006, and $15,000 of depreciation had been deducted on the building to the date of sale. Dontrell's marginal tax rate is 32% without considering these two transactions. As a result of these transactions
I.Dontrell will pay additional tax of $4,500.
II.The building is Section 1245 property.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Dontrell sells a building used in his business at a gain of $20,000. The building was purchased in 2006, and $15,000 of depreciation had been deducted on the building to the date of sale. Dontrell's marginal tax rate is 32% without considering these two transactions. As a result of these transactions
I.Dontrell will pay additional tax of $4,500.
II.The building is Section 1245 property.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Statement I is correct as the gain of $20,000 will be subject to capital gains tax at the marginal rate of 32%, resulting in $6,400 in taxes. However, since $15,000 of depreciation had been previously deducted, this amount will be subject to recapture under Section 1250 of the Internal Revenue Code, resulting in an additional tax of $1,500 (equivalent to 25% of $15,000). Therefore, the total additional tax paid by Dontrell will be $4,900.

Statement II is irrelevant to the outcome of the tax calculation for this transaction, and whether the building is Section 1245 property or not does not affect the amount of tax payable.

Dontrell Sells a Building Used in His Business at a Gain