The chart below describes the § 1231 assets sold by the Annie Company (a sole pr

Question

The chart below describes the § 1231 assets sold by the Annie Company (a sole proprietorship) this year. Compute the gain or loss from each asset disposition and determine the net § 1231 gain treated as long-term capital gain for the year. Assume there is a § 1231 lookback loss of $10,000.

Asset Acquired Sold Cost Depreciation Sale Price

Copier 6/11/08 5/11/2015 $50,000 $46,500 $ 1,000

Office building 9/13/05 9/24/2015 100,000 24,000 150,000

Delivery Van (not listed property) 1/12/07 1/13/2015 22,000 21,000 30,000

Tooling Machine 8/11/09 7/27/2015 50,000 37,000 19,000

Explain the concepts of 1231, 1245 and 1250. What are these provisions and why were they created? What was Congress trying to achieve by enacting these code sections?

Explanation / Answer

copier = Loss = 50000 - 46500 - 1000 = $2500

Office Building = Gain = 100000 - 24000 - 150000 = $74000

Delivery Van = Gain = 22000 - 21000 - 30000 = $29000

Tooling Machine = Gain = 50000 - 37000 -19000 = $6000

Now, the concepts of 1231, 1245 and 1250 has been created to provide treatments to various categories of assets on gains and losses on sale of assets. The gains and losses are treated differently and taxed at different rates.

When determining what character of gain you will have when you sell a business asset it is first important to determine the kind of asset you are selling and also in which type of entity the asset is being held in. The three categories of assets that are most commonly sold are (1) Section 1231 property, (2) Section 1245 property, and (3) Section 1250 property.

Section 1231 property are assets that are used in your trade or business and are held by the Taxpayer for more than one year. A gain on the sale of Section 1231 business property is treated as long-term capital gain and is taxed at a maximum rate of 15%.

Section 1245 property is (1) all depreciable personal property, whether tangible or intangible, and (2) certain depreciable real property (usually, real property that performs specific functions, for example, a storage tank, but not buildings or structural components of building). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset that was sold. Any gain up to the amount of the previously taken depreciation will be taxed at ordinary income rates.

Section 1250 property consists of real property that is not Section 1245 property (as defined above), generally buildings and their structural components. When you sell Section 1250 property you will have to be aware of possible Section 1250 depreciation recapture as well as "unrecaptured Section 1250 gain" and it is treated as long-term gain.This Section 1250 depreciation recapture is taxed at ordinary income rates.

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