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Purchase and Sale of Investment Property (Residential or Commercial)
Ethan has purchased an investment property for $900,000. During his period of ownership, he takes
$230,000 in depreciation deductions. He has also made some improvements to the property. At the time
of sale, his adjusted basis in the property is $760,000. He subsequently sells the property for $1.2 million.
In the year of sale, he is single and reports self-employment income of $315,000.
Te tax applies as follows:
Gain on Sale
$440,000
($1.2 million less adjusted basis of $760,000)
Depreciation Recapture
$230,000
Total Gain
$670,000
(Gain on sale plus depreciation recapture)
Schedule C Income
$315,000
New AGI
$985,000
($315,000 + $670,000)
Excess AGI over $200,000
$785,000
($985,000 – $200,000)
Lesser Amount
(Taxable)
$670,000
(Capital gain)
Tax Due
$25,460
($670,000 x 0.038)
The statute provides no guidance as to whether Ethan can defer the 3.8% tax by
entering into a like-kind exchange when he sells the property. This question may be
addressed in regulations at a later time, but for the present is not resolved.
NOTE:
Example 8