Which of the following transactions results solely in a Section 1245 (\(\S 1245\)) gain?

• A. Sale of inventory at a gain
• B. Sale of depreciable equipment at a price below its original cost but above its adjusted basis
• C. Sale of land held for investment at a gain
• D. Sale of depreciable equipment at a price above its original cost

Answer: (B)

Verified step by step guidance

1. Understand the concept of Section 1245 property: Section 1245 property refers to depreciable personal property used in a trade or business, such as machinery or equipment. Gains under Section 1245 are calculated based on the recapture of depreciation deductions taken on the property.
2. Identify the key condition for a Section 1245 gain: A Section 1245 gain occurs when depreciable equipment is sold for an amount above its adjusted basis but below or above its original cost. The gain is limited to the amount of depreciation previously claimed on the property.
3. Analyze the transactions provided: Evaluate each transaction to determine whether it involves Section 1245 property and meets the criteria for a Section 1245 gain. For example, the sale of inventory does not involve depreciable property, and the sale of land held for investment does not qualify as Section 1245 property.
4. Focus on the transaction involving depreciable equipment: The sale of depreciable equipment at a price below its original cost but above its adjusted basis results in a Section 1245 gain because the gain is attributable to the recapture of depreciation deductions.
5. Exclude transactions that do not meet Section 1245 criteria: The sale of inventory and the sale of land held for investment do not involve Section 1245 property, and the sale of depreciable equipment at a price above its original cost includes both Section 1245 gain and potential Section 1231 gain. Therefore, the correct transaction is the sale of depreciable equipment at a price below its original cost but above its adjusted basis.