Max is selling a truck that he uses in his business. He has taken $5,000 of depreciation on the truck and wants to use the installment sale method to sell the truck to Jerry for a down payment and an installment note over 36 months. He paid $40,000 for the truck and is selling it for $38,000. What are the tax consequences of this transaction?
1) Max must recapture $3,000 of the Section 1245 depreciation taken as ordinary income in the year of the sale.
2) Max has $5,000 of depreciation recapture taxed at the 25% tax rate.