Sample Questions
Question 1
Easy
Under MACRS, what is the recovery period for nonresidential real property placed in service after 2017?
Solution
C is correct.
Under MACRS (IRC Section 168), nonresidential real property is depreciated over 39 years using the straight-line method with the mid-month convention. This applies to commercial buildings such as office buildings, warehouses, retail stores, and factories.
Under MACRS (IRC Section 168), nonresidential real property is depreciated over 39 years using the straight-line method with the mid-month convention. This applies to commercial buildings such as office buildings, warehouses, retail stores, and factories.
Question 2
Medium
A taxpayer sells Section 1245 property for 350,000. The property was purchased for 500,000 and has an adjusted basis of 200,000 after 300,000 of accumulated depreciation. How is the 150,000 gain characterized?
Solution
A is correct.
Under IRC Section 1245, gain on the sale of Section 1245 property is recharacterized as ordinary income to the extent of all depreciation previously allowed or allowable. Here, the gain is 350,000 - 200,000 = 150,000. Accumulated depreciation is 300,000. Since the gain of 150,000 is less than the accumulated depreciation of 300,000, the entire gain is ordinary income. Only if the gain exceeded 300,000 would the excess be treated as Section 1231 gain.
Under IRC Section 1245, gain on the sale of Section 1245 property is recharacterized as ordinary income to the extent of all depreciation previously allowed or allowable. Here, the gain is 350,000 - 200,000 = 150,000. Accumulated depreciation is 300,000. Since the gain of 150,000 is less than the accumulated depreciation of 300,000, the entire gain is ordinary income. Only if the gain exceeded 300,000 would the excess be treated as Section 1231 gain.
Question 3
Hard
A business sells equipment (Section 1245 property) for $275,000. The equipment was purchased for $240,000, and accumulated depreciation is $160,000. How is the gain characterized?
Solution
D is correct.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
