What is Section 1231 property? What is Section 1231 gains or losses? Recently I was asked these questions as I mentioned 1231 property to a client who was preparing to dispose of certain assets. A tax attorney at The McGuire Law Firm has prepared the article below to discuss 1231 property and hopefully the article will provide useful information to you.
Section 1231 gains and losses are the taxable gains or losses from 1231 dispositions or transactions, which will be further discussed below. The tax treatment of such gain or loss as capital or ordinary is dictated by the net gain or net loss from all 1231 transactions. Below are some 1231 transactions:
1) Sale or exchange of a leasehold- the leasehold must be used in trade or business and have been held longer than a year.
2) Sale or exchange of horses or cattle held for breeding, dairy or sporting and longer than two years
3) Sale or exchange of real property or depreciable personal property and the property was used in a trade or business and held for one year or longer. Depreciable personal property would include section 197 intangibles.
4) Condemnations when the condemned property has been held for longer than one year
5) Sale or exchange of un-harvested crops
6) Cutting or disposing of timber and other minerals like coal or iron ore.
7) Casualties and thefts.
So what is the type of loss or gain? If there is a net section 1231 loss, it is an ordinary loss. If there is a net section 1231 gain, it is ordinary income in regards to the amount of non-recaptured section 1231 losses from the previous year and the remaining amount would be claimed as long term capital gain. That being said, what is/are non-recaptured section 1231 losses? These losses are the net 1231 losses for the previous five years that have not been applied yet to net 1231 gain(s). Thus, if you have had section 1231 losses in any of the five preceding tax years, a net gain for the current year from the sale of section 1231 assets will be ordinary income to the amount of the prior losses. The losses are applied against your net section 1231 gain and start from the earliest loss within the five year time period.
A Denver tax attorney at The McGuire Law Firm can assist you with your business and individual tax mattes and questions such as the tax implications upon the sale of business assets and interests and other tax matters. To speak with a Denver tax attorney or business attorney, contact The McGuire Law Firm and schedule a free consultation!