By Gerald Deutsch, Esq., Glen Head, NY Section 1231 normally is a “taxpayer friendly” section in that any gain from the sale or disposition of a section 1231 asset is treated as a capital gain and if the sale or disposition results in loss, the loss is treated as an ordinary loss.
By Gerald Deutsch, Esq., Glen Head, NY
Section 1231 normally is a “taxpayer friendly” section in that any gain from the sale or disposition of a section 1231 asset is treated as a capital gain and if the sale or disposition results in loss, the loss is treated as an ordinary loss.Section 1231 normally is a “taxpayer friendly” section in that any gain from the sale or disposition of a section 1231 asset is treated as a capital gain and if the sale or disposition results in loss, the loss is treated as an ordinary loss.
Property used in the trade or business is defined as property held for more than one year that is used in the taxpayer’s trade or business that is of a character subject to the allowance for depreciation, and real property used in the taxpayer’s trade or business. It also includes certain timber, coal, and domestic iron ore, livestock, and unharvested crops. It does not include property that would properly be included in inventory if on hand at the close of the taxable year; property held primarily for sale to customers; certain copyrights, literary, musical, or artistic compositions; and certain publications of the U.S. government.
It is easy to understand that the net of “section 1231 transactions” that is realized by the taxpayer must be combined with the net of such transaction that comes from taxpayer’s partnerships and S corporations (Form 4797 line 2 of Part I if a gain on line 10 of Part II if a loss) but line 8 may not be fully understood. That line reads, “Nonrecaptured net 1231 losses from prior years.”
The instructions for line 8 reads:
“Your net section 1231 gain – is treated as ordinary income to the extent of your ‘nonrecaptured section 1231 losses.’ Your nonrecaptured 1231 losses are your net section 1231 losses deducted during the 5 preceding tax years---”
It is important, therefore, that taxpayers be aware of their five year history of section 1231 losses, if any, because failure to do so could cause faulty tax planning. For example, assume that in 2004 a taxpayer had a section 1231 loss in the amount of $100,000 that reduced his income by that amount in that year. Now, in 2009, taxpayer, as a result of the economy, has realized $100,000 in capital losses and wants sell real estate used in his business that will yield a capital gain which can be offset against that capital loss and result in no tax.
Unfortunately, what happened in 2004 – five years ago – will be expensive for taxpayer. The real estate used in his business is not a capital asset but a “section 1231 asset” and will only be taxed as a capital gain if there are no “section 1231 losses” in that year – or the five most recent preceding taxable years. In this case, since there was such a loss in the pertinent period the result here is that the $100,000 gain (i) can’t be offset against the capital loss, and (ii) will be taxed as ordinary income.
So while most taxpayers consider a three year statute of limitations, a longer period must be considered if a section 1231 loss has been claimed during that longer period.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)