Question

Tonya Jefferson, a sole proprietor, runs a successful lobbying business in Washington, D.C. She doesn't sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business in order to buy a place somewhere sunny and warm. Tonya's townhouse is worth $1,000,000 and the land is worth another $1,000,000. The original basis in the townhouse was $600,000, and she has claimed $250,000 of depreciation deductions against the asset over the years. The original basis in the land was $500,000. Tonya has located a buyer that would like to finalize the transaction in December of the current year. Tonya's marginal ordinary income tax rate is 35 percent and her capital gains tax rate is 20 percent.

what effect does the gain or loss on her tax liability or tax savings?

The answer of $ 217500 is not correct.

Answer 1

Tonya has an unrecaptured Section 1250 gain of $250,000 on building which is taxed at a flat rate of 25% in 2018. Also, she has Section 1231 gain of total $900,000 which is taxed at given 20% for capital gain.

Therefore she have a total tax liability of $ 242,500 for her gains.

Capital gain on Sale of Building
Particulars	Amount	Explanation
(1). Amount realized	$1,000,000	Given
(2). Original Basis	600,000	Given
(3). Accumulated Depreciation	250,000	Given
(4). Adjusted Basis	350,000	(2) - (3)
(5). Total Gain or (Loss) recognized	$ 650,000	(1) - (4)
(6). Unrecaptured Sec.1250 gain	$ 250,000	Lessor of (5) or (3)
(7). Remaining Sec. 1231 gain	$ 400,000	(5) - (6)

Capital gain on Sale of Land
Particulars	Amount	Explanation
(1). Amount realized	$1,000,000	Given
(2). Original Basis	500,000	Given
(3). Accumulated Depreciation	-	-
(4). Adjusted Basis	500,000	(2) - (3)
(5). Sec. 1231 gain recognized	$ 500,000	(1) - (4)

Summary:

• Sec.1250 unrecaptured gain = $ 250,000
• Sec. 1231 capital gain = $(400,000 + 500,000) = $900,000

Tax Calculation -

Unrecaptured Sec.1250 Gain	250,000 × 25%	$ 62,500
Remaining Sec.1231 Gain	900,000 × 20%	$ 180,000
Total Tax Liability		$242,500