Problem:
Margie purchased a commercial building in January 1990 for $100,000. She also purchased equipment for $30,000 at that time and opened a business. She replaced the roof of the building in August 1995 at total cost of $20,000. She has depreciated the building and new roof using the straight-line method. The equipment has been fully depreciated. On January 1, 2006 she sold the business for $750,000. The contract allocated the sales price as follows:
Building $400,000
Equipment $50,000
Goodwill $175,000
Non compete covenant $125,000
The covenant is paid monthly and is for five years. How much gain or loss must Margie report? Classify the gain or loss and explain. Give Margie some suggestions for reducing her tax liability.