Business Assets

Question 1

Section 1231 Assets

Answer 1

Business property held for greater than 1 year used in a trade or business.

Question 2

What assets are included as Section 1231 Assets?

Answer 2

Depreciable machinery/equipment, real property (buildings, land), and leasehold improvements.

Question 3

What assets are NOT considered as section 1231?

Answer 3

Livestock held for breeding/dairy and unharvested crops sold with farmland

Question 4

How are net gains treated for Section 1231 assets?

Answer 4

Net gains for section 1231 assets are treated as long-term capital gains and are thus subjected to lower tax rates

Question 5

How are net losses treated for Section 1231 assets?

Answer 5

Net losses for section 1231 assets are deductible against ordinary income up to $3000 per year. Net losses in excess can be carried forward to future years

Question 6

What is Section 1245 Recapture?

Answer 6

Section 1245 recapture applies to depreciable personal property (e.g., machinery, vehicles, equipment). The gain up until total appreciation of the asset is taxed as ordinary income, and the remaining gain is taxed as long-term capital gain.

Question 7

A business buy equipment for $50,000. The equipment depreciates $30,000 over time. The equipment is sold for $60,000. How much is the gain and how will the gain be taxed?

Answer 7

This is Section 1245 Recapture

Total Gain=$60,000-$20000 (adjusted basis)=$40000

Recapture=$30,000 taxed as ordinary income

Remaining Gain= $10,000 taxed as Long-term capital gain

Question 8

What is Section 1250 Recapture

Answer 8

Section 1250 recapture applies to real property (e.g., buildings, leasehold improvements). Straight-line depreciation is not recaptured as ordinary income, but taxed as unrecaptured Section 1250 gain (max 25% rate). Any accelerated depreciation exceeding the straight-line depreciation is recaptured as ordinary income.

Question 9

A business buys a building for $500,000. The business claims $200,000 in straight-line depreciation and sells the building for $600,000. What is the gain and how is the gain taxed?

Answer 9

Total Gain=$600,000-$300,000=$300,000

Unrecaptured Section 1250 Gain=$200,000 taxed at a max of 25%

Remaining Gain=$100,000 taxed as Long-term capital gain.

Question 10

What are the key differences between 1245 vs. 1250 Recapture

Answer 10

*See google doc