What is the income classification when gain is recognized on the transfer of a depreciable asset to a related party?
Understand the Problem
The question asks about the income classification when a gain is recognized from the transfer of a depreciable asset to a related party. It requires knowledge of tax law, specifically how such gains are treated for income tax purposes.
Answer
Ordinary income.
The gain recognized on the transfer of a depreciable asset to a related party is classified as ordinary income.
Answer for screen readers
The gain recognized on the transfer of a depreciable asset to a related party is classified as ordinary income.
More Information
When a depreciable asset is transferred to a related party, any gain recognized is treated as ordinary income. This rule, under Section 1239 of the Internal Revenue Code, ensures that gains are not improperly classified as capital gains which may have lower tax rates.
Tips
A common mistake is assuming the gain can be classified as capital gains. In related party transactions, verify criteria outlined in applicable tax codes.
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