Tax Shop
Tax Shop
Charles Trautman, EA · Since 1969
← Return to Footnotes
Footnotes · EA Part 2 study notes · Depreciation · Worked Examples

Worked Examples

These are the problems from my depreciation worksheet, each with the arithmetic laid out. Figures that depend on annual limits are restated for 2026.

1. Section 1245 — sale of machines

Marla purchased three machines (1245 property) for $5,000 and has taken $3,000 of depreciation. She sells the three old machines for $6,000.

  1. Basis: $5,000 cost – $3,000 depreciation = $2,000
  2. Gain: $6,000 sale – $2,000 basis = $4,000
  3. Ordinary income (1245): limited to the $3,000 of depreciation taken
  4. Remainder, $1,000, is Sec. 1231 gain

2. Section 1250 — sale of rental property

Wendy sold rental property (1231 property) for $320,000. Cost was $275,000 and $148,500 of straight-line depreciation was taken.

  1. Basis: $275,000 – $148,500 = $126,500
  2. Gain: $320,000 – $126,500 = $193,500, all Sec. 1231 gain
  3. No ordinary recapture because the depreciation was straight-line
  4. $148,500 of the gain is unrecaptured 1250 gain (up to 25%); the remaining $45,000 is 0/15/20% gain
  5. My worksheet had the basis as $127,500 — a typo; the $193,500 gain was right.

3. Section 1250 — sale of a building

Matthew sold a building for $300,000. Cost $200,000, depreciation $120,000.

  1. Basis: $200,000 – $120,000 = $80,000
  2. Realized 1231 gain: $300,000 – $80,000 = $220,000
  3. Straight-line depreciation, so $0 ordinary recapture; $120,000 is unrecaptured 1250 gain (max 25%), $100,000 is regular long-term gain

4. Section 179 plus depreciation, then a sale

A freezer was purchased last year for $60,000. Sec. 179 of $10,000 and depreciation of $18,000 were taken. It is sold this year for $52,000.

  1. Basis: $60,000 – $10,000 – $18,000 = $32,000
  2. Gain: $52,000 – $32,000 = $20,000
  3. Depreciation taken ($28,000) exceeds the gain, so the entire $20,000 is ordinary income under Sec. 1245

5. Section 179 limits — large purchase

A business buys a $4,000,000 machine in 2026 and nothing else.

  1. $4,000,000 is below the $4,090,000 phase-out threshold, so no reduction updated 2026
  2. Maximum Sec. 179 expense is $2,560,000 (2026), subject to business taxable income updated 2026
  3. The remaining $1,440,000 can be taken as 100% bonus depreciation in the same year, assuming the machine was acquired after January 19, 2025 added 2026
  4. Phase-out formula: $2,560,000 – (cost of 179 property placed in service – $4,090,000), not below zero

6. Truck — sale after depreciation

Sam purchased a truck (1245 property, 100% business) for $10,000 and took $6,160 of depreciation. He sold it for $7,000.

  1. Basis: $10,000 – $6,160 = $3,840
  2. Gain: $7,000 – $3,840 = $3,160
  3. Gain is less than depreciation taken, so all $3,160 is ordinary income

7. Truck — 179, then sale

Ben buys a truck for $15,000 and takes $3,000 of Sec. 179. Later he has taken $8,000 of depreciation and sells for $13,000.

  1. Beginning basis after 179: $15,000 – $3,000 = $12,000; after depreciation: $12,000 – $8,000 = $4,000
  2. Gain: $13,000 – $4,000 = $9,000
  3. Depreciation taken ($11,000 incl. 179) exceeds the gain, so all $9,000 is ordinary income

8. Apartment building — 1231 gain

Willis sells an apartment building on December 31 for $500,000. Original cost $742,500; depreciation through last year $243,000, plus $27,000 for the year of sale.

  1. Total depreciation: $243,000 + $27,000 = $270,000 — don't forget the year-of-sale depreciation
  2. Basis: $742,500 – $270,000 = $472,500
  3. Gain: $500,000 – $472,500 = $27,500 Sec. 1231 gain, all of it unrecaptured 1250 gain (25% max) since the building was straight-line

9. Auto with trade-in — maximum Sec. 179

Larry trades in his old car (basis $3,000) for a $2,000 allowance and buys a new car for $12,000, used 90% for business. Business taxable income is ample.

  1. The trade-in is a taxable sale since 2018: $2,000 allowance – $3,000 basis = $1,000 loss on the old car updated 2026
  2. The new car's basis is its full $12,000 cost (no basis carries over from a trade-in any more) updated 2026
  3. Sec. 179 is limited to the business portion and to the first-year auto cap: lesser of $12,000 × 90% = $10,800 or $12,300 × 90% = $11,070 (2026 cap) → $10,800 updated 2026
  4. Any 179 plus depreciation in year 1 cannot exceed $11,070 total ($20,300 × 90% = $18,270 if bonus is claimed)

10. Trademark — amortization and sale

A trademark was bought last year for $150,000 and amortized over 15 years. It is sold this year for $200,000.

  1. Amortization: $150,000 ÷ 15 = $10,000 per year; basis after one year is $140,000
  2. Gain: $200,000 – $140,000 = $60,000
  3. $10,000 (amortization taken) is Sec. 1245 ordinary income; $50,000 is Sec. 1231 gain

11. Depletion — gas well

A gas well has gross income of $30,000 and the owner is a royalty owner (independent).

  1. Percentage depletion: $30,000 × 15% = $4,500
  2. Limited to 100% of taxable income from the property (oil and gas); 50% for other minerals
  3. Compare with cost depletion and take the larger

12. Start-up expenses

Expenses incurred investigating and creating an active trade or business — market research, accounting fees, training employees, securing customers — total $53,000.

  1. First-year deduction: $5,000 reduced by the excess over $50,000 → $5,000 – $3,000 = $2,000
  2. Remaining $51,000 amortized over 180 months from the month business begins
  3. Not start-up costs: interest expense, taxes, research costs, logo design, and the price of equipment or a building

Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.