Question

Chapter 17 - Question 6 :
I figure out the answers, could you check and let me know what wrong (if any). Thank you
Miguel receives tangible personal property as an inheritance in 2016. The property was depreciated by the deceased (Miguel's father), and Miguel will also depreciate it. At the date of the deceased's death, the property was worth $532,000. The deceased had purchased it for $900,000 and had taken $523,000 of depreciation on the property. Miguel takes $223,000 of depreciation on the property before selling it for $482,000 in 2018.
a.   Indicate whether the following statements are "True" or "False" regarding the tax status when Miguel sells the property.
• Any gain Miguel has will be treated as long-term capital gain? False
• Miguel's basis for the asset is $532,000? True
• The property is a § 1231 asset for Miguel. True
• Any recapture potential does not carry over to Miguel. True
b.   If an amount is zero, enter "0".
Miguel has a gain of $173,000 as a result of the sale, of which $0 is treated as ordinary income due to § 1245 and $173,000 is treated as § 1231 gain.

Answer 1

Ans.a. Indicate whether the following statements are "True" or "False" regarding the tax status when Miguel sells the property.
• Any gain Miguel has will be treated as long-term capital gain? - “True”

Explanation: Mighul holds the property from 2016 to 2018. If you hold the property more than one year, you should consider it as long term capital gain.
• Miguel's basis for the asset is $532,000? - “True”

Explanation: Basis of Assets for the inherited property is the “Fair Market Value” at the time deceased's death ie., $532,000.

• The property is a § 1231 asset for Miguel. – “True”

Explanation: Mighul holds the property for personal use, you should consider it as Capital assets.

• Any recapture potential does not carry over to Miguel. – “True”

Explanation: Depreciation recapture potential will not carry over to Miguel, since it’s a personal property. Recapture is applicable for business property.

Ans.b.   If an amount is zero, enter "0".
Miguel has a gain of $173,000 as a result of the sale, of which $0 is treated as ordinary income due to § 1245 and $173,000 is treated as § 1231 gain?

Gain on sale = sale amount > Adjusted value of asset(Basis of Assets – Depreciation after inheritance)

                     Therefore, sale amount - Adjusted value of asset

                                              = $482,000 - $309,000 ($532,000- $223,000)

                    Gain on sale     = $173,000

From the Gain on sale, no amount ($0) is treating as Ordinary Income, because Miguel is using a personal property. Gain on sale of $173,000 is considered as Long term capital gain.