Calculating Luke's Recognized Gain on Building Sale

What are the amount and character of Luke's recognized gain or loss on the building?

To calculate Luke's recognized gain or loss on the building, we must calculate the adjusted basis and compare it to the fair market value at the time of sale.

Determining Luke's Recognized Gain on the Building Sale

Adjusted Basis Calculation:

Building Adjusted Basis = Building Cost - Accumulated Depreciation

Building Adjusted Basis = $200,000 - $45,000

The building's adjusted basis is $155,000.

Recognized Gain Calculation:

Recognized Gain or Loss on the Building = Fair Market Value - Building Adjusted Basis

Building Recognized Gain or Loss = $325,000 - $155,000

Building Recognized Gain = $170,000

The building has a recognized gain of $170,000. Therefore, since the building was held for several years, the gain would be classified as a long-term capital gain.