Ken sold a rental property for $858,000. He received $182,000 in the current yea
ID: 2348291 • Letter: K
Question
Ken sold a rental property for $858,000. He received $182,000 in the current year and $169,000 each year for the next four years. $617,500 of the sales price was allocated to the building and the remaining $240,500 was allocated to the land. Ken purchased the property several years ago for $614,500. When he initially purchased the property, he allocated $477,500 of the purchase price to the building and $137,000 to the land. Ken has claimed $13,900 of depreciation deductions over the years against the building.If Ken had no other sales of
Explanation / Answer
a)
Description of Building Sale
Amount
Explanation
(1) Amount Realized
$
858,000
Given
(2) Adjusted Basis
600,600
Given
(3) Gain Realized
257,400
(1) – (2)
(4) Gross Profit Percentage
30%
(3) / (1)
(5) Payment received in year 0
$
182,000
Given
Gain recognized in year 0
$
54,600
(5) × (4), $13,900 of
unrecaptured §1250 and
$40,700 §1231 gain
b)
Character
Amount
Rate
Tax
Unrecaptured §1250 (§1231 gain)
$
13,900
25%
$
3,475.00
Other §1231 gain
$
40,700
15%
$
6,105.00
Tax
$
9,580.00
The sale qualifies as an installment sale. As a result, in the year of the sale Ken has a §1231 gain of $13,900 taxed at a maximum 25% rate. He also has a §1231 gain of $40,700 taxed at a maximum 15% rate. In the year of the sale, Ken’s tax liability is $9,580.00. The unrecaptured §1250 gain is recognized before any of the §1231 gain (as indicated by the regulations). The remaining gain is taxed in subsequent years. The computation for the current year is as follows:
Description of Building Sale
Amount
Explanation
(1) Amount Realized
$
858,000
Given
(2) Adjusted Basis
600,600
Given
(3) Gain Realized
257,400
(1) – (2)
(4) Gross Profit Percentage
30%
(3) / (1)
(5) Payment received in year 0
$
182,000
Given
Gain recognized in year 0
$
54,600
(5) × (4), $13,900 of
unrecaptured §1250 and
$40,700 §1231 gain
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