Question

In 2019, Rod (from the previous question) sold a motorcycle for $12,000 (adjusted basis $8,000, accumulated depreciation $3,000) and a storage building for $25,000 (adjusted basis $15,000, accumulated depreciation $7,000). Both assets have been in service for several years, and were used 100% for business.

Taking into account what you calculated in part A., how much, if any, ordinary income, net §1231 gain or loss, and unrecaptured §1250 gains, will Rod report to the IRS for 2019?

Answer 1

1231 gain 1250

motor cycle = NA NA

it is not a property

storage building

15000-7000=8000 7000 as ordinary income and 10000 as capital gains

gain=25000-8000=17,000

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Section 1231 property is a type of property, defined by section 1231 of the U.S. Internal Revenue Code. Section 1231 property is real or depreciable business property held for more than one year.

A section 1231 gain from the sale of a property is taxed at the lower capital gains tax rate versus the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain does not apply.

Examples of section 1231 properties include buildings, machinery, land, timber, and other natural resources, unharvested crops, cattle, livestock, and leaseholds that are at least one year old. However, section 1231 property does not include poultry and certain other animals, patents, inventions, and inventory–such as goods held for sale to customers.

Section 1250 Property

The IRS defines section 1250 property as all real property, such as land and buildings, that are subject to allowance for depreciation, as well as a leasehold of land or section 1250 property.

Tax Treatment on Section 1250 Property Gains

Much like with section 1245 property, gains on section 1250 property qualify as ordinary income if they are less than or equal to the amount the property has depreciated, and the gains exceed the depreciation then the income is treated as capital gains. During the year of the sale, depreciation recapture is taxable as ordinary income if the sale of the property is executed in an installment method.