Depreciation. Saengdao is a professional cellist and is self-employed. She bought a handmade cello in May of 2017 for $40,000. She used the cello in performances throughout the rest of 2017, all of 2018 and part of 2019. In November of 2019, she sold the cello for $37,000. Saengdao took depreciation deductions for the cello each year. Total depreciation at the time of the sale was $19,010. What is the amount and character of her income (or loss) from the sale? Depreciation. Saengdao is a professional cellist and is self-employed. She bought a handmade cello in May of 2017 for $40,000. She used the cello in performances throughout the rest of 2017, all of 2018 and part of 2019. In November of 2019, she sold the cello for $37,000. Saengdao took depreciation deductions for the cello each year. Total depreciation at the time of the sale was $19,010. What is the amount and character of her income (or loss) from the sale? $16,010 section 1231 gain $16,010 capital gain $19,010 ordinary income; $3,000 section 1231 loss $16,010 ordinary income

When Saengdao sells the cello, she must consider the adjusted basis of the cello, which is the original cost minus any depreciation taken. The difference between the selling price and the adjusted basis will determine the amount and character of her income or loss from the sale. Original cost of the cello: $40,000 Total depreciation taken: $19,010 Adjusted basis of the cello: $40,000 - $19,010 = $20,990 Selling price of the cello: $37,000 To calculate the gain or loss from the sale, we subtract the adjusted basis from the selling price: $37,000 (selling price) - $20,990 (adjusted basis) = $16,010 Since the cello was used in her business, the gain is subject to depreciation recapture. Depreciation recapture on equipment used in a business is treated as ordinary income up to the amount of depreciation taken. Any remaining gain is treated as a capital gain. In this case, the entire gain of $16,010 is less than the total depreciation taken ($19,010), so the entire gain is treated as ordinary income due to depreciation recapture. The amount and character of her income from the sale is $16,010 of ordinary income. There is no section 1231 gain or loss because the entire gain is recaptured as ordinary income.

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