Question

The Angel Corporation purchased an office building for $600,000 12 years ago. The corporation claimed $80,000 of cost recovery deductions before it sold the building for $700,000.

1. Determine the amount and type of gain or loss that Angel Corporation recognizes on the sale of the building
2. Would your answer change if Angel was a sole proprietorship?
3. Would your answer change if Angel Corporation incurred $43,000 of Section 1231 losses in the prior year?

Answer 1

A) $700,000 –($600,000 - $80,000) = $180,000 total gain. Only $80,000 of this gain is subject to Section 291 recapture, however, as that is the limit of Section 1245 recapture if that provision applied. Thus, the Section 291 recapture = 20% x $80,000 = $16,000. The corporation recognizes $16,000 of ordinary income due to Section 291 and the remaining $164,000 ($180,000 –$16,000) is Section 1231 gain.

B)

If Angel were a sole proprietorship, there would be no Section 291 recapture. The entire $180,000 gain would be Section 1231 gain; however, the $80,000 unrecaptured Section 1250 gain would be subject to the 25% capital gains tax rate when included in the sole proprietor's tax return.

C)

If Angel Corporation has $43,000 of Section 1231 losses in the prior year, $43,000 of the $164,000 Section 1231 gain would be recaptured (under the look-back rules) and included in ordinary income (along with the $16,000 Section 291 recapture). Only the remaining $121,000 ($180,000 - $16,000 - $43,000) is Section 1231 gain.

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