Betty is in the business of breeding and racing horses. Except for the transactions below, she has no other sales or exchanges, but she has $14,000 in Unrecaptured Sec. 1231 losses. Consider the following transactions that occur during the year. A building with an adjusted basis of $300,000 is destroyed by fire. Insurance proceeds of $500,000 are received, but Betty does not plan to replace the building. The building was built 12 years ago at a cost of $430,000 and straight-line depreciation has been used. The building was used to provide lodging to her employees. A rental house and lot were sold for $170,000 ($120,000 house: $50,000 land). The rental house had an original cost of $75,000. The rental house is fully depreciated. The basis in the land was $24,000. Four acres of the farm were sold to the state to widen the highway and Betty receives $35,000. The adjusted basis of the four acres is $15,000 and the land was inherited from her mother 15 years ago A racehorse purchased four years ago for $200,000 was sold for $550,000. Total depreciation amounts to $160,000. Equipment purchased three years ago for $200,000 is sold for $100,000. The adjusted basis of the equipment is $120,000. a. What amount of Sec. 1245 ordinary income must be recognized? b. What is the amount of the net Sec. 1231 gain or loss? c. Assume that Betty is in the 33% marginal tax bracket. Keeping in mind that any unrecaptured Sec. 1231 losses will offset the Unrecaptured Sec. 1250 gains, how much of her overall gain will be taxed at: a. Ordinary rates? b. 25% c. 15% Betty is in the business of breeding and racing horses. Except for the transactions below, she has no other sales or exchanges, but she has $14,000 in Unrecaptured Sec. 1231 losses. Consider the following transactions that occur during the year. A building with an adjusted basis of $300,000 is destroyed by fire. Insurance proceeds of $500,000 are received, but Betty does not plan to replace the building. The building was built 12 years ago at a cost of $430,000 and straight-line depreciation has been used. The building was used to provide lodging to her employees. A rental house and lot were sold for $170,000 ($120,000 house: $50,000 land). The rental house had an original cost of $75,000. The rental house is fully depreciated. The basis in the land was $24,000. Four acres of the farm were sold to the state to widen the highway and Betty receives $35,000. The adjusted basis of the four acres is $15,000 and the land was inherited from her mother 15 years ago A racehorse purchased four years ago for $200,000 was sold for $550,000. Total depreciation amounts to $160,000. Equipment purchased three years ago for $200,000 is sold for $100,000. The adjusted basis of the equipment is $120,000. a. What amount of Sec. 1245 ordinary income must be recognized? b. What is the amount of the net Sec. 1231 gain or loss? c. Assume that Betty is in the 33% marginal tax bracket. Keeping in mind that any unrecaptured Sec. 1231 losses will offset the Unrecaptured Sec. 1250 gains, how much of her overall gain will be taxed at: a. Ordinary rates? b. 25% c. 15%
