KNOWLEDGE|
(1) |
IRC Section 1231 gain The term "Section 1231 gain" means any recognized gain on the sale or exchange of property used in the trade or business, and any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of property used in the trade or business, or any capital asset which is held for more than one year and is held in connection with a trade or business or a transaction entered into for profit. |
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(2) |
IRC Section 1231 loss The term "Section 1231 loss" means any recognized loss from a sale or exchange or conversion. (a) 1231(a)(4)(A) In determining under this subsection whether gains exceed losses the Section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and the Section 1231 losses shall be included only if and to the extent taken into account in computing taxable income. (b) 1231(a)(4)(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of property used in the trade or business, or capital assets which are held for more than one year and are held in connection with a trade or business or a transaction entered into for profit, shall be treated as losses from a compulsory or involuntary conversion. (c) 1231(a)(4)(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any property used in the trade or business, or capital asset which is held for more than one year and is held in connection with a trade or business or a transaction entered into for profit. This subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions. |
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(1) |
Timber, coal or domestic iron ore |
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(2) |
Livestock cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition. other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition. Such term does not include poultry. |
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(3) |
Unharvested corp In the case of an unharvested crop on land used in the trade or business and held for more than one year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as "property used in the trade or business. |
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(4) |
Exception (a) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year (b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (c) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of Section 1221(a) (d) a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in paragraph (5) of Section 1221(a |
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(1) |
Five-year look-back rule under IRC Section 1231(c) A second "recapture" provision was enacted in 1984. Section 1231(c) is designed to reduce timing strategies regarding Section 1231 assets. For instance, in the year 2023, an individual realizes a net Section 1231 gain of $2,000. In order to ascertain the amounts that must be reported as ordinary income and long-term capital gain, it is necessary to evaluate the Section 1231 gains and losses incurred during the preceding five-year period. The Section 1231 gains and losses from the years 2018 to 2022 are as follows.
This data is utilized to determine the appropriate reporting of the Section 1231 gain for the year 2023, as illustrated in the subsequent analysis.
To curtail this perceived abuse, Section 1231(c) states that if there is net Section 1231 gain for a year, the gain is ordinary to the extent that there are "unrecaptured" losses for the preceding five years. |
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(2) |
Post-recapture Section 1231 gain Any post-recapture Section 1231 gain is long-term capital gain. Capital losses from other non–Section 1231 property may be applied against Section 1231 gains. Example: Marta sold Section 1231 property producing a gain of $50,000. Marta figures the gain on Form 4797, Sales of Business Property, and also reports the gain on Schedule D, Capital Gains and Losses. On Schedule D, Marta also reports a non–Section 1231 capital loss of ($75,000). Marta may offset the non–Section 1231 capital loss of ($75,000) against the 1231 capital gain of $50,000. Marta can use $3,000 of the remaining loss to offset other income and can carryforward $22,000 of the remaining capital loss. |
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