Question

Kathleen purchased an apartment building six years ago for $275,000. The building was depreciated using the straight-line method. The building was recently sold for $285,000; her adjusted basis at the time of the sale was $215,000. Ignoring the Medicare tax, if any, what are the tax implications for Kathleen?

Answer 1

As per Section 1250 "Real property" used in trade or business if held for over 12 months,

Gain arising from sale of such asset will be taxed as follows;

Upto the extent of SLM depreciation - Unrecaptured gain - taxable @ 25%

Difference between depreciation method followed and SLM depreciation - Recaptured gain - Ordinary gain/(loss)

Gain in excess of above two - Section 1231 gain/(loss)

Particulars	$
Original cost of building	$      275,000
Less Adjusted basis as on day of sale	$      215,000
Total depreciation till date	$        60,000
Sales consideration	285000
Less Adjusted basis as on day of sale	$      215,000
Profit on sale	$        70,000
Bifurcation of profit
Sec 1250 Gain taxable @ 25%	$         60,000
Sec 1231 Gain (Capital gain - 0/15%/20%)	$         10,000

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