Firm P, a noncorporate taxpayer, purchased residential realty in 1985 for $1 million. This year it sold the realty for $450,000. Through date of sale, Firm P deducted $814,000 accelerated depreciation on the realty. Straight-line depreciation would have been $625,000.a. Determine the amount and character of Firm P’s recognized gain on sale.b. How would your answer change if Firm P was a corporation?

Explanation:

Amount realized on sales                                                     $450,000            

Cost                                                  $1,000,000    

Accumulated depreciation              $814,000

                                                                                                $186,000

Realized gain                                                                          $264,000

Ordinary income = excess of  $814,000 accelerated

Over $625,000 straight-line depreciation      $189,000

Section 1231 gain                                                $75,000

Recognized gain                                                 $264,000

(b)

Ordinary income = excess of $814,000 accelerated

Over $625,000 straight-line depreciation                 $189,000

20% additional recapture 20% * $75,000                  $15,000

Section 1231 gain                                                           $60,000

Recognized gain                                                            $264,000

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