**********Why do you apply 25% and 20% and not 35% of ordinary income tax rate?

And where did 25% and 20% come from???

52. Tonya Jefferson (single), a sole proprietor, runs a successful lobbying business in Washington, D.C. She doesn't sell many business assets, but she is planning on retiring and selling her historic townhouse, from which she runs her business, to buy a place somewhere sunny and warm. Tonya's townhouse is worth $1,000,000 and the land is worth another $1,000,000. The original basis in the townhouse was $600,000, and she has claimed $250,000 of depreciation deductions against the asset over the years. The original basis in the land was $500,000. Tonya has located a buyer that would like to finalize the transaction in December of the current year. Tonyas marginal ordinary income tax rate is 35 percent, and her capital gains tax rate is 20 percent. a) What amount of gain or loss does Tonya recognize on the sale? What is the character of the gain or loss? What effect does the gain or loss have on her tax liability? Property is sold for a gain. Gain is section 1231 gain. Amount of gain is: - Section 1231 gain = Selling price - Adjusted basis $1,000,000+ $1,000,000 - ($600,000 - $250,000) - $500,000 = $1,150,000 Gain on sale of property will be $1,150,000. Gain to the extent of depreciation ($250,000) is taxable at 25%. Balance gain of $900,000 is taxable at preferential rate of 20%