A business taxpayer sold all depreciable assets of the business, calculated the gains and losses, and would like to know the final character of those gains and losses. The taxpayer had $353,000 of adjusted gross income before considering the gains and losses from sale of the business assets. The taxpayer had unrecaptured § 1231 lookback loss of $12,000. What is the treatment of the gains and losses summarized in the following table after all possible netting and reclassification have been completed? What is the taxpayer’s adjusted gross income? (Ignore the self-employment tax deduction.)

Question

AssetPurchase Date
Sale Date
Depreciation
Gain (Loss)
Machine 110/10/17
11/11/19
$323,000
$66,000
Machine 210/02/17
11/11/19
   65,000
(15,000)
Machine 309/23/15
11/11/19
 183,000
23,000
Machine 409/23/15
11/11/19
   28,000
64,000
?

What will be an ideal response?

Answer 1

The taxpayer has adjusted gross income of $491,000 after including the effect of the property transactions. Machine 1’s $66,000 gain is all ordinary income due to § 1245 depreciation recapture. Machine 3’s $23,000 gain is all ordinary income due to § 1245 depreciation recapture. Machine 4 has $28,000 of ordinary income due to § 1245 depreciation recapture (equals depreciation taken) and $36,000 § 1231 gain ($64,000 – $28,000). Machine 2’s $15,000 loss is a § 1231 loss. There is a $21,000 net § 1231 gain ($36,000 gain – $15,000 loss) for the year. The $12,000 § 1231 unrecaptured lookback loss converts $12,000 of this gain to ordinary income, leaving $9,000 of the net § 1231 gain to be treated as long-term capital gain. The net ordinary gain for the year is $129,000 ($66,000 + $23,000 + $28,000 + $12,000). Adjusted gross income is $491,000 ($353,000 + $129,000 + $9,000).