Question

Discuss the three characters of gain or loss. Describe in detail each type. What is the recapture provision?

Compare and contrast depreciation, amortization, and depletion. Include an explanation of the assets subject to these types of cost recovery.

Discuss several examples of itemized deductions. Choose one and describe in detail. Have you had experience utilizing itemized deductions on your tax return?

Answer 1

Three characters of gain or loss

1. Ordinary gain or loss: When an ordinary asset (asset held for less than a year and used in trade or business) is sold at gain, that gain is characterised as ordinary gain and taxed at ordinary rates. When ordinary asset is sold at loss, ordinary loss is got adjusted against other ordinary income.

2. Section 1231 gain or loss: When section 1231 property (depreciable assets and land used in trade and held for more than one year) is sold at gain, the net gain is treated as long term capital gain and taxed accordingly. Section 1231 gain on individual depreciable asset may be recharacterised as ordinary gain under depreciation recapture rule. Section 1231 losses are treated as ordinary loss.

3. Section 1245 gain or loss: When section 1245 property (personal property or amortizable intangible assets) are sold at gain, the lesser of gain recognized or accumulated depreciation is recaptured as ordinary gain and the remaining gain is recharacterised as section 1231 gain.

Recapture provision is a provision to treat the gain up to the extent of accumulated depreciation on a depreciable asset as an ordianry gain and remaining gain as capital gain.