a. Two months ago, Dawes Inc. broke a multi-year lease on office space that it h

Question

a. Two months ago, Dawes Inc. broke a multi-year lease on office space that it had occupied for 4 years. 3 years ago, Dawes paid $85,300 to install carpeting and new electrical fixtures throughout the office. Accumulated depreciation through the date that Dawes vacated the office was $51,000. What is the tax consequence of Dawes abandonment of the carpeting and fixtures?

A. $34,300 ordinary loss

B. No tax consequence because it did not sell or exchange these assets

C. $34,300 capital loss

D. $34,300 Section 1231 loss

Explanation / Answer

Since the leasehold improvements have been done within the boundaries of the leased space and the stay has been for more than 3 years, the depriciaition benefits can be claimed by the person who has spent the for improvement.

Amount Spent =$85,300

Amount Claimed =$51,000

Balance Depriciation=$85,300-$51,000 =$34,300

Since Dawes is leaving the office space early than the stipulated depriciated life of improvements and he is physically abondoning the assets, he can claim the loss equal to depriciable basis of asset at the time of abondonment under section 1231.

Hence, option-(d) is correct.

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