Question

Duc sold various assets during the year. Asset 1 one generated a $13,000 1231 gain, asset 2 a $15,000 1231 loss, and asset 3 a $6,000 unrecaptured 1250 gain. Additionally, Duc had $1,000 of recaptured net 1231 losses from the prior 5 years. What is (are) the amount (s) and character (s) of gain and loss from these transactions?

a. $1,000 unrecapured 1250 gain, $1,000 unrecaptured 1250 gain, $2,000 net 1231 gain.

b. $1,000 ordinary income, $3,000 long-term capital gain taxed at 1/25/20%

c. $1,000 ordinary income, $3,000 unrecaptured 1250 gain.

d. $4,000 1231 gain.

e. $1,000 ordinary income, $3,000 net 1231.

Answer 1

Section 1231 property are assets that are used in your trade or business and are held by the Taxpayer for more than one year. A gain on the sale of Section 1231 business property is treated as long-term capital gain and is taxed at a maximum rate of 15%, at least through December 31, 2012. A loss on the sale of Section 1231 business property is treated as ordinary loss and can reduce ordinary income on the Taxpayer's return and is not subject to the capital loss limitations ($3,000 limitation for individuals or capital gain limitation for corporations).   However there is a Section 1231 recapture rule that if you sell business property at a gain and you have deducted ordinary losses due to the sale of Section 1231 property in that past five years then the Section 1231 gain that you recognize will be taxed as ordinary income, using the Taxpayer's ordinary income rate, and not the preferential 15% maximum capital gain rate.

Therefore $1000 recapturing loss 1231 will be $1000 ordinary Income.

A section 1250 gain is recaptured upon the sale of depreciated real estate, just as with any other asset; the only difference is the rate at which it is taxed. The justification for the gain is to offset the benefit of previously used depreciation allowances. While the gains attributed to accumulated depreciation are taxed at the section 1250 recapture tax rate, any remaining gains are only subject to the long-term capital gains rate of 15%

Here $6000 unrecaptured 1250 gain after setoff capital loss available $3000 1231 loss comes to $3000 1250 gain. Hence $3000 is unrecaptured 1250 gain.

Option C is right Answer.