Reg SIM #54 help

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  • #2940051 Reply
    Captain Awesome

    I'm confused on the explanation for question #1 of this REG sim #54:
    Section 1245 Ordinary Gain

    Equipment used in business and held for over a year qualifies as Sec 1231 property. Upon sale of such property, any net gain is Sec 1231 gain taxed at capital gains rate and any net loss is Sec 1231 ordinary loss. Section 1245 provisions on sale of depreciable personal property would also apply, wherein any depreciation previously deducted or deductible must be recaptured as ordinary income to the extent of smaller of (1) gain recognized or (2) accumulated depreciation.

    Clara’s ordinary income on sale of equipment is calculated as follows:
    Selling Price $10,000
    Adjusted Basis (Cost $72,000 – Accum Dep $68,000) $4,000
    Gain $6,000
    Sec. 1245 Ordinary income (smaller of gain realized or accumulated depreciation) $6,000

    I thought the recaptured depreciation would be 1245 ordinary and the gain would be 1231 LTCG. What am I missing? This question was different than similar ones I've seen in that the selling price was far below the original. In other examples the selling price was something like $80,000 in which all the depreciation is recaptured and there is also a gain.

    AUD - 80
    BEC - 80
    FAR - 82
    REG - 82



    #2940195 Reply

    For section 1245, you can only recapture the lesser of the gain or depreciation. Any excess will be section 1231 gain. From your Qs, only the gain $6000 can be fully recaptured, nothing is transferred to section 1231. I’m also studying for Reg and I hope I explained this better

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