XYZ Company (C Corporation), a calendar year taxpayer, paid $6,500,000 for an apartment complex and allocated $500,000 of the cost to the land. XYZ place the realty in service on November 11 of the previous year. On October 5 of the current year, XYZ sold the apartment complex for $6,700,000 and allocated $600,000 of the price to the land. How much of this gain is treated as capital gain, and how much is ordinary gain? Group of answer choices $28,210 ordinary gain and $312,840 capital gain. $40,002 ordinary gain and $360,008 capital gain. $141,050 ordinary gain and $200,000 capital gain. $200,010 ordinary gain and $200,000 capital gain.
The gain from the sale of the apartment complex is divided into two parts: the recapture of depreciation (which is treated as ordinary income) and the remaining gain (which is treated as capital gain). First, we need to calculate the depreciation. The apartment complex (excluding land) is depreciable over a period of 27.5 years. Since the property was placed in service on November 11 of the previous year, it was in service for about 1.9 years (1 year plus about 11/12 of a year) before it was sold. The depreciable basis is $6,000,000 ($6,500,000 purchase price minus $500,000 allocated to land). So, the depreciation is $6,000,000 / 27.5 * 1.9 = $415,636. The total gain from the sale is $6,700,000 - $6,500,000 = $200,000. However, since the depreciation exceeds the total gain, the entire gain is treated as ordinary income due to depreciation recapture. Therefore, the correct answer is $200,000 ordinary gain and $0 capital gain.
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