Question

Lena is a sole proprietor. In April of this year, she sold equipment purchased four years ago for $28,000 with an adjusted basis of $16,800 for $18,480. Later in the year, Lena sold another piece of equipment purchased two years ago with an adjusted basis of $8,400 for $5,460. What are the tax consequences of these tax transactions

Answer 1

Lena's ordinary gain/loss resulting from these transactions are:

sales value - book value = ($18,480 - $16,800) + ($5,460 - $8,400) = $1,680 - $2,940 = -$1,260 or $1,260 loss

Lena must recognize an ordinary gain of $1,680 due to depreciation recapture for the equipment sold in April. But she must also recognize a section 1231 capital loss for the sale of the second equipment. Section 1231 losses are treated as ordinary losses while section 1231 gains are treated as capital gains. Since both the gain and the loss is treated as ordinary gains/losses, then she can deduct the net loss from her gross income.

Answer 2

Lena only has an ordinary gain not a capital gain.

Step-by-step explanation:

Depreciation from the sale of first equipment = Selling amount - Adjusted basis = $18,480 - $16,800 = $1,680

Loss from the sale of second equipment = Selling amount - Adjusted basis = $5,460 - $8,400 = $2,940 loss

Since Lena only has depreciation recapture of $1,680, which falls within $0–$38,600 for a single tax payer, from the sale of the first asset and a loss of $2,940 from the sale of second asset, Lena only has an ordinary gain not a capital gain.