Step 1: Allocate the $1,421,880 Purchase Price

- Action: Distributed the total cost across tangible assets (machinery, furniture, building) and intangible assets (patent, goodwill).
- Rule: Used the residual method to ensure each asset is recorded at its fair market value.
Step 2: Elect Section 179 for New Equipment
- Figure: $262,000 (Machinery) + $242,000 (Furniture).
- Action: Deducted the full $504,000 immediately to maximize the 2025 tax shield.
Step 3: Calculate Section 197 Amortization
- Basis: $211,880 (Combined Patent and Goodwill).
- Rule: Amortized over exactly 15 years (180 months).
- Calculation: Resulted in a $4,708 deduction for the 4-month period in 2025.
Step 4: Real Estate & Land Treatment
- Building: Applied 39-year straight-line depreciation starting in September.
- Land: Recorded at $32,000 with $0 depreciation (non-depreciable asset).
Step 5: Final Total Cost Recovery
- 2025 Figure: $2,312,495.
- Result: Successfully integrated existing 2024 assets with the new 2025 acquisition assets for a complete tax profile.

Property Dispositions & Netting Hierarchy

Module 10: Property Dispositions & Netting Hierarchy

Case Study: Asset Disposal Reconciliation for Mr. Woods

Subheading: Quantitative Breakdown of §1231, §1245, and Capital Gain Netting

Step 1: Determine Gains, Losses, and Character for Dispositions
- Driving Range Land: $42,400 Sales Price - $106,000 Basis = -$63,600 Ordinary Loss.
- Iron Byron Machine: $31,000 Sales Price - $6,400 = $24,600 Adjusted Basis = $24,600 Total Gain ($18,000 §1245 Ordinary Income; $6,600 §1231 Gain).
- Business Building: $285,000 Sales Price - $138,000 Adjusted Basis = $147,000 Total Gain ($56,000 Unrecaptured §1250; $91,000 §1231 Gain).
- Marketable Securities & Investment Land: Combined Long-Term Capital Gains (LTCG) totaled $10,160, offset by a $3,200 investment property loss.
Step 2: Execute §1231 Netting and Look-Back Reconciliation
- Net §1231 Calculation: $6,600 (Iron Byron) + $91,000 (Building) + $25,000 (Land) - $1,120 (Chair Loss) = $121,480 Net §1231 Gain.
- Look-Back Application: Reclassified $6,720 of the §1231 gain as ordinary income to recapture non-recaptured net §1231 losses from the 2020–2024 look-back period.
- Resulting Character: $6,720 Ordinary Income: $121,480 Long-Term Capital Gain (LTCG).
Step 3: Apply Capital Loss Carryforward to Tax Rate Groups
- Carryforward Total: Identified a $14,100 Long-Term Capital Loss (LTCL) carryover from the 2024 tax year.
- Netting Priority: Applied the $14,100 loss against the 25% rate group (unrecaptured §1250 gain), reducing it from $49,280 to $35,180.
- Net LTCG Calculation: Final 0/15/20% LTCG group totaled $128,440 after all netting was finalized.
Step 4: Final Reconciliation of Taxable Income
- Base Income: $456,000 (taxable income before transactions).
- Ordinary Adjustments: Minus $63,600 (Land Loss) plus $18,440 (Recapture) plus $6,720 (Look-back) = -$38,440.
- Capital Gain Addition: $417,560 + $35,180 (25% LTCG) + $128,440 (0/15/20% LTCG) = $581,180.
- Final Figure: $581,180 Total Taxable Income.

Property Dispositions & Tax Liability Analysis

Dtermination of Final Tax Liability

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Step 1: Segment Taxable Income into Rate Brackets
- Ordinary Income: Calculated as $581,180 total income minus $35,180 (25% gain) and $128,440 (LTCG) = $417,560.
- 25% Rate Group: $35,180 (Unrecaptured §1,250 gain).
- 0/15/20% Rate Group: $128,440 (Remaining Net LTCG).
Step 2: Compute Tax on Ordinary Income
- Calculation: Applied the 2025 individual tax brackets to the $417,560 ordinary portion.
- Result: Total ordinary tax of $115,693.
Step 3: Compute Tax on 25% Gain
- Calculation: $35,180 × 25%.
- Result: Total tax on unrecaptured gain of $8,795.
Step 4: Compute Tax on Long-Term Capital Gains
- 15% Portion: $80,660 of the gain was taxed at 15% (reaching the maximum 15% breakpoint) = $12,099.
- 20% Portion: The remaining $47,780 of the gain was taxed at 20% = $9,556.
- Total LTCG Tax: $21,655.
Step 5: Final Tax Liability Reconciliation
- Action: Added all calculated segments ($115,693 + $8,795 + $12,099 + $9,556).
- Final Figure: $146,143 Total Tax Liability.