Betty, whose tax rate is 33%, is in the business of breeding and racing horses. Except for the transactions below, she has no other sales or exchanges and she has no unrecaptured net 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 used to provide lodging for her employees. Straight-line depreciation has been used.
• Four acres of the farm are condemned by the state to widen the highway and Betty receives $50,000. The land was inherited from her mother 15 years ago when its FMV was $15,000. Her mother purchased the land for $10,300. Betty does not plan to purchase additional land.
• A racehorse purchased four years ago for $200,000 was sold for $550,000. Total depreciation allowed using the straight-line method amounts to $160,000.
• Equipment purchased three years ago for $200,000 is exchanged for $100,000 of IBM common stock. The adjusted basis of the equipment is $120,000. If straight-line depreciation had been used, the adjusted basis would be $152,000.
• An uninsured pony with an adjusted basis of $20,000 and FMV of $35,000, which her daughter uses only for personal use, is injured while attempting a jump. Because of the injury, the uninsured pony has to be destroyed by a veterinarian.
Task(s):
a. What amount of Sec. 1245 ordinary income must be recognized? 40,000
b. What amount of Sec. 1250 ordinary income must be recognized? 25, 000
c. Will the loss resulting from the destruction of her daughter's pony be used to determine net Sec. 1231 gains or losses? Yes it can be determined
d. What is the amount of the net Sec. 1231 gain or loss? Loss of 1600
e. After all of the netting of gains or losses is completed, will the gain resulting from the involuntary conversion of the building be treated as LTCG?
f. What is the amount of her unrecaptured Sec. 1250 gain?