Question

During the current year, Kayla recognizes a $40,000 Sec. 1231 gain on sale of land and a $22,000 Sec. 1231 loss on the sale of land. Prior to this, Kayla's only Sec. 1231 item was a $10,000 loss four years ago. Kayla, single, is in the 24% marginal tax bracket (her taxable income is $100,000). The amount of tax resulting from these property transactions is

Answer 1

Answer: $4,320

Explanation:

Kayla's net gain on her Section 1231 property is $18,000 ($40,000 - $22,000).

Section 1231 property gains are taxed at a maximum of 15%. However, because Kayla recorded a $10,000 loss four years ago, this preferential rate does not apply to her.

As a rule, if you have deducted Section 1231 property losses in the past five years, any gain will be taxed at normal income bracket rate. This is known as the recapture rule. Kayla's net gain will therefore be taxed at her marginal tax bracket rate (24%).

`(24)/(100)` X & 18,000

=$4,320