Question

Question 2.2. Sylvio purchased an apartment building as an investment in January 2008 for $383,500 and sold it for $475,000 in 2014. He reported $68,436 of allowed accumulated straight-line depreciation. If Sylvio is in the highest tax bracket for ordinary income, how much of his gain qualifies for preferential tax treatment? (Points : 1)

Answer 1

The Asset is held for more than a year, so it will be taxed under long term capital gain rates.

Cost Basis	$     383,500.00
Less: Accumulated Depreciation	$     (68,436.00)
Adjused Basis	$     315,064.00
Selling Price	$     475,000.00
Gain	$     159,936.00

Capital gains from selling Section 1250 real property that is required to be recaptured in excess of straight line depreciation are taxed at 25% (or at your marginal tax rate, if it is lower than 25%).

That is,

The property has sold for more than the basis that had been adjusted for depreciation, the initial gains are recaptured based on the original purchase price of $383,500. This makes the first $68,436 of the profit subject to the unrecaptured section 1250 gain, while the remaining $91,500 is considered regular long-term capital gains.

With that result:

$68,436 would be subject to the higher capital gains tax rate of up to 25%

The remaining $91,500 would be taxed at the long-term capital gains rate of 15%.

So in this case $91,500 of the gain istaxed at preferential rates (after netting).

Hope that the explanation given is sufficient amd understandable. If any other explanaion or clarification is needed, please let me know.

Thank you!