Question

The following information applies to the next two questions:

Gross Selling Price: $1,000,000
Net Selling Price: $950,000
Accumulated Depreciation: $200,000
Loan Payoff: $350,000
Purchase Price: $350,000
Depreciated Value: $150,000
Capital Gain Tax Rate: 20%
Tax Rate on Capital Gains Due to Depreciation 25%

What are the taxes due on the sale?

Answer 1

The total taxes due on the sale are $170,000, which includes a capital gain tax of $120,000 and a depreciation recapture tax of $50,000.

Step-by-step explanation:

Taxes Due on the Sale of an Asset:

The taxes due on the sale consist of two parts: the capital gain tax and the depreciation recapture tax. The capital gain is calculated by subtracting the purchase price and the expenses of the sale from the net selling price. For our example, the capital gain is $950,000 (Net Selling Price) - $350,000 (Purchase Price) = $600,000. The capital gain tax at 20% on this amount would be $600,000 * 20% = $120,000. Next, we calculate the depreciation recapture tax.

Since the accumulated depreciation is $200,000, we apply the tax rate of 25% to this amount. Therefore, the depreciation recapture tax is $200,000 * 25% = $50,000. Add the two taxes to find the total tax liability from the sale, which is $120,000 + $50,000 = $170,000.