Kaplan Certified Financial Planner (CFP) Practice Test 2026 - Free CFP Practice Questions and Study Guide

The correct answer indicates that Rusty has a $2,500 gain from the sale of his packing machine and delivery truck, and this gain is categorized as Section 1245 depreciation recapture.

Section 1245 property includes personal property, such as machinery and equipment, that has been subject to depreciation under tax law. When this type of property is sold at a gain, any gain attributable to the depreciation taken on the asset is recaptured as ordinary income, rather than treated as a long-term capital gain. This means that the gain is taxed at ordinary income tax rates rather than the typically lower capital gains tax rates.

In Rusty's case, the fact that the gain is characterized as Section 1245 depreciation recapture implies that the equipment or asset was depreciated and that the gain of $2,500 is linked directly to that depreciation. This treatment ensures that the tax benefits received through depreciation are reversed to prevent taxpayers from receiving double benefits on the same asset. Therefore, the gain Rusty realizes on the sale of his packing machine and delivery truck is not classified as a capital gain but instead as ordinary income because it reflects the recapture of tax benefits previously taken.

The understanding of how gains from the sale of depreciated assets are taxed is