Hi,

I'm confused about recapture under Sec.1245 on 2011 AICPA Released Questions. That is Question 10.

"Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec.1245?"

a. $0 b.$40,000 c.$60,000 d.$100,000

Answer: c. $60,000

My answer is $40,000 which is ordinary income as Sec.1245. At first glance, the depreciation is $60,000, so the answer would appear to be $60,000. However, Sec.1245 requires that the lesser of the depreciation taken $60,000 or the gain recognized($200,000-$160,000=$40,000) be recaptured.  Therefore, my answer is $40,000. I read the 2011 Becker Reg text R3-31 as well. What's wrong?

 Asset Basis      Gain on Sale

 160,000             200,000

 (60,000)          (100,000)

 100,000             100,000

When computing the gain on the sale, you begin with the asset's basis rather than the original purchase price. 

• Adjusted Basis=
• + Purchase costs (title & escrow fees, broker commissions, shipping, sales tax, etc.)
• + Improvements (rehabilitation expenses & substantial repairs)
• + Legal fees (to defend or to perfect title to the property, zoning costs, etc.)
• + Selling costs (title & escrow fees, broker commissions, shipping, transfer fees, etc.)
• - Accumulated depreciation, depletion, or amortization
• - Casualty or theft Loss
• - Other decreases to basis