Property Transactions-Section 1231 and Recapture
Sec. 1231 Sec. 1245 Sec. 1250
Land on which factory is located yes --- ---
Equipment yes yes ---
Inventory --- --- ---
Patent yes yes ---
Land held primarily for sale* --- --- ---
Factory building yes --- yes
*Gain or loss is ordinary because the land is held for sale. pp. I13-5, I13-9 and I13-11.
I13-34 a. $600. The net Sec. 1231 gain of $3,000 is taxed at 20%.
b. Decrease by $1,320 ($4,320 - $3,000). The net Sec. 1231 gain of $15,000 is taxed at
20%. The $12,000 loss is ordinary and her tax is reduced by $4,320 (36% x $12,000).
pp. I13-3 and I13-4.
I13-36 a. $57,000 ($60,000 - $3,000)
b. $52,000 ($60,000 - $8,000)
If the $8,000 realized loss ($19,000 - $27,000) is a capital loss, only $3,000 of the loss may be
deducted in the current year. $5,000 of the loss is carried forward for an indefinite period. If the
$8,000 realized loss is a Sec. 1231 loss and there are no Sec. 1231 gains, the $8,000 loss is an
ordinary loss and is deductible. Vicki is assumed to be in an active trade or business and the passive
loss limitations do not apply. p. I13-3.
I0-1 a. $80,000. The gain is a Sec. 1231 gain that is classified as a LTCG since the
corporation does not have any Sec. 1231 losses.
b. Zero. The capital loss carryforward may be used only to offset capital gain income.
pp. I13-7 and I13-8.
I13-39 1995 $2,000 NLTCG
1996 Zero - $4,000 ordinary loss
1997 Zero - $8,000 ordinary loss
1998 Zero - The $4,000 net Sec. 1231 gain is ordinary income since there is $12,000 of
nonrecaptured net Sec. 1231 losses at the beginning of the year. The nonrecaptured net Sec. 1231
losses at the end of the year are $8,000.
1999 $5,000 NLTCG and $8,000 of ordinary income
2000 Zero - $7,000 ordinary loss. pp. I13-7 and I13-8.
I13-42 a. $230,000. The maximum selling price that Elizabeth could sell the equipment for
without having to recognize Sec. 1245 ordinary income is $230,000, the adjusted basis.
b. $291,000. The first $270,000 of gain resulting from the sale of the equipment is Sec.
1245 ordinary income. If she sells the property and has a $61,000 gain, the gain is Sec. 1245
ordinary income. If SP - $230,000 = $61,000, then the selling price is $291,000. pp. I13-8 and I13-
I13-43 a. $160,000. Sale of the racehorse results in Sec. 1245 ordinary income.
c. No. The pony is a personal-use asset.
d. Yes. The casualty gain is netted against casualty losses of Sec. 1231 property and non-
personal use capital assets held more than one year. Since there are no such losses, the $200,000 gain
is combined with Sec. 1231 gains and losses. After all Sec. 1231 gains and losses are netted, a net
Sec. 1231 gain of $405,000 ($425,000 - $20,000) exists, thus all Sec. 1231 gains and losses are treated
as LTCG and LTCL.
e. $405,000. The net Sec. 1231 gain exists because of four transactions:
$200,000 casualty gain - building
35,000 condemnation of land
190,000 sale of racehorse for more than original cost
( 20,000) loss on exchange of equipment
f. $130,000. The unrecaptured Sec. 1250 gain is taxed at 25%. If Sec. 1250 provided for
the recapture of all depreciation instead of just additional depreciation, $130,000 of the gain resulting
from the involuntary conversion would have been ordinary income.
pp. I13-6 through I13-12.
I13-44 a. Depreciation of $403 ($4,200 x 0.1920 x 0.5) is allowed in 2000. The 50% results
from the half-year convention.
Business Portion Personal Use
of Truck Portion
Amount realized $2,100* $ 900
Minus: Adjusted basis (1,613)** ( 1,800)
Realized gain (loss) $ 487 ($ 900)
* (0.70 x $3,000)
** ($4,200 - $2,587)
The $487 gain is ordinary income under Sec. 1245. The $900 loss is a capital loss, but is not
deductible since that portion of the truck is a personal use asset. pp. I13-8 and I13-9.
I13-46 a. $6,000. ($40,000 - $34,000).
b. Zero. The exchange is a like-kind exchange.
d. $20,000. ($41,000 - $21,000) of Sec. 1245 ordinary income.
e. The gain is $31,000. ($52,000 - $21,000). $29,000 of Sec. 1245 ordinary income and
$2,000 of Sec. 1231 gain.
I13-57 1. T. Gain to the extent of excess depreciation, the excess of accelerated over straight-line
depreciation is Sec. 1250 ordinary income.
2. F. Corporate taxpayers do not have unrecaptured Sec. 1250 gain taxed at 25%.
3. T. If accelerated cost recovery is used, building #2 is Sec. 1245 property.
4. T. If straight-line method is used, building #2 is Sec. 1231 property. Some of the gain is
Sec. 1250 gain, not more than 20% of depreciation, but most of the gain is Sec. 1231
5. T. If accelerated cost recovery is used and the building is sold for more than its original
basis, gain due to depreciation is Sec. 1245 ordinary income and the remaining gain
is Sec. 1231 gain.
6. F. Corporate taxpayers do not have unrecaptured Sec. 1250 gain taxed at 25%.
7. F. A building is Sec. 1245 property only if placed in service during the period from
January 1, 1981, to December 31, 1986, and accelerated cost recovery is allowed.
8. F. Corporate taxpayers do not have unrecaptured Sec. 1250 gain taxed at 25%.
9. T. 20% (gain that would be ordinary income if building was Sec. 1245 less gain that is
Sec. 1250 ordinary income) is additional Sec. 1250 ordinary income for corporate
10. F. $30,000 might be ordinary income due to the five-year-lookback rule and $8,000 is
Sec. 1250 ordinary income [20%($40,000 – 0)] but all $40,000 would not be ordinary