Tonya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, DC. She doesn't...

Tonya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, DC. She doesn't sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business, 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 amount of gain or loss does Tonya recognize on the sale?

The answer 650,000 is not correct.

Solutions

Expert Solution

Notes:

1. Total gain recognized on sale of building = $650,000

Unrecaptured Sec.1250 gain = Past recognized accumulated depreciation = $250,000

Remaining Sec 1231 gain = $650,000 - $250,000 = $400,000

2. Sec 1231 capital gain on sale of land = $500,000

Hence, Unrecaptured Sec.1250 gain on sale building = $250,000

Sec 1231 capital gain on sale of building and land = $400,000 + $500,000 = $900,000

Therefore, the total amount of gain Tonya recognize on the sale = $250,000 + $900,000 = $1,150,000

ekkarill92 answered 1 year ago

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