Question

On April 4, 2017, Mexco sold stock it held as an investment. It had a $300,000 short-term capital loss on the sale. It also sold a building, equipment, and the land under the building on July 1, 2017. Information about each asset is presented below. Mexco used MACRS depreciation on the equipment and straight-line depreciation on the building. Additionally, Mexco had a $75,000 Code Sec. 1231 loss last year (and it has no Code Sec. 1231 gains or losses in previous years). Mexco did not sell any other assets this year. What are the tax results of the sale?

	Building	Equipment	Land
Cost	$700,000	$200,000	$100,000
Accumulated depreciation to sale date	400,000	130,000
Amount realized on the sale	500,000	90,000	300,000

Answer 1

First of all we will calculate loss or gain from sale of Building, Equipment and Land i.e section 1231 property:-

Building
Selling Price		$500,000
Cost	$700,000
Less: Accumulated Depreciation to Sale	$400,000
Adjusted Basis		($300,000)
Gain on Building			$200,000
Equipment
Selling Price		$90,000
Cost	$200,000
Less: Accumulated Depreciation to Sale	$130,000
Adjusted Basis		($70,000)
Gain on Equipment			$20,000
Land
Selling Price		$300,000
Cost	$100,000
Less: Accumulated Depreciation to Sale	0
Adjusted Basis		($100,000)
Gain on Land			$200,000
Net Gain on Building , Equipment and Land			$420,000
Less: Recaptured depreciation
On Building	$400,000
On Equipment	$130,000
Total Recaptured Depreciation			$530,000

As recaptured depreciation exceeds Section 1231 Gain, the entire gain of

$420,000 will be treated as ordinary income and not long term capital gain.

The Tax results of the sale are as under:-

Ordinary income (Refer Note 1)			$420,000
Short term Capital Loss to be carried forward to next year (Refer Note 2)			$300,000
Section 1231 Loss of Last year (to be carried forward to next year)			$75,000

Notes:

1. Ordinary Income of Mexco will get merged with his total income and will be taxed according to his tax bracket.
2. Short Term Capital Loss can reduce ordinary income by upto $3,000. However this amount is $1,500 for married persons filling their tax return separately. In the given question no information is given regarding marital as well as return filling status of Mexco and hence we cannot determine the amount of short term capital loss that can be used to reduce his ordinary income.