Question

1.

Joe purchased a piece of equipment considered §1245 property for $5,500. Depreciation expense of $3,000 has been taken. Assume the equipment was held for more than one year. For each situation below, indicate: a) the amount of gain/loss and b) how the gain/loss is treated from a tax standpoint.

Situation 1: Sold for $7,000

Situation 2: Sold for $3,000

Situation 3: Sold for $2,000

2.

A taxpayer received a parcel of land as a gift. At the time of the gift, the land had a FMV of $10,000. The donor’s adjusted basis was $12,000.   Calculate gain/loss for each of the following situations:

Situation # 1: Taxpayer sells the land for $14,500.

Situation #2: Taxpayer sells the land for $9,500.

Situation #3: Taxpayer sells the land for $10,500.

3. Jeanette owns a rental property that she used for 20 days and rented for 80 days. The rental income was $5,000 and expenses included the following; mortgage interest $2,500; property tax $1,500; insurance and repairs $1,000 and depreciation $2,000. Calculate the net rental income, using the Tax Court Method.

Answer 1

1. If you sell Section 1245 property, Gain on sale of such property up to depreciation charged earlier is treated as ordinary income , taxed at ordinary income tax rates , if gain exceeds beyond the depreciation , such gain is treated as per section 1231 property and taxed at 15% as long term capital gain, and loss on section 1245 property is also considered as ordinary loss which reduces ordinary income

a) Gain and loss

Situation 1 $7,000 - ($5,500 - $3,000) = $4,500

Situation 2   $3,000 - ($5,500 - $3,000) = $500

Situaltion 3   $2,000 - ($5,500 - $3,000) = -$500

b) Gain/ loss taxed

Situation 1 $3,000 taxed at ordinary income tax rate , $1,500 is a long term capital gain taxed at 15%

Situation 2   $500 taxed at ordinary income tax rate

Situaltion 3 -$500 is considered as ordinary loss and deducted from income.

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