a. Compute Lynn’s gain recognized on the sale of the warehouse. b. What is the character of this gain? c. How would your answers change if Lynn was a noncorporate business?
Eleven years ago, Lynn, Incorporated purchased a warehouse for $315,000. This year,
the corporation sold the warehouse to Firm D for $80,000 cash and D’s assumption of
a $225,000 mortgage. Through date of sale, Lynn deducted $92,300 straight-line
depreciation on the warehouse.
Required:
a. Compute Lynn’s gain recognized on the sale of the warehouse.
b. What is the character of this gain?
c. How would your answers change if Lynn was a noncorporate business?
The two forms of income that may be produced through investments or the sale of assets are ordinary gain and capital gain. The way taxes are applied to the two is where the fundamental distinction lies. Income from a company's regular business activities or the sale of warehouse (in this case) held for less than a year constitutes an ordinary gain. Wages, salaries, company revenue, as well as short-term capital gains from either the sale of assets held for less than a year, are examples of ordinary gain. Ordinary gains are normally subject to taxation at the taxpayer's marginal income tax rate, which is determined by their annual taxable income. A capital gain is money received from the sale of an asset, such as stocks, real estate, or fine art, whose value has increased over time.
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