Question

maxwell sold an office building this year, generating $30,000 of gain. the building had $400,000 of accumulated depreciation for tax purposes. straight-line depreciation would have been $380,000. what is the character of maxwell's gain? multiple choice question. $20,000 section 1231 gain and $10,000 ordinary income. $30,000 ordinary income. $20,000 ordinary income and $10,000 section 1231 gain.

Answer 1

Maxwell's gain would be characterized as $20,000 of ordinary income, representing the excess depreciation taken, and $10,000 as Section 1231 gain, after accounting for the actual gain realized on the sale.

Step-by-step explanation:

When Maxwell sold an office building with a gain of $30,000 and the building had accumulated $400,000 of depreciation for tax purposes, we need to identify the character of the gain.

Since straight-line depreciation would have been $380,000, the excess depreciation used ($400,000 - $380,000) amounts to $20,000. This part of the gain is recaptured as ordinary income under Section 1245 because it represents the excess depreciation over what straight-line depreciation would have been.

Therefore, the remaining gain of $10,000 ($30,000 total gain - $20,000 ordinary income recapture) is considered Section 1231 gain, which could be treated as a long-term capital gain if certain conditions are met. The correct characterization of Maxwell's gain is $20,000 ordinary income and $10,000 Section 1231 gain.