Chapter 13: Property Transactions Sec 1231 And Recapture Flashcards
Section 1231 property
Primarily business property, real or depreciable, used in a trade or business with a holding period of more than one year
Timber, coal, or domestic iron ore
Livestock
Unharvested crops
Not investment property
Net sec. 1231 gains
Treated as long term capital gains (and losses)
BUT portion may be treated as ordinary income due to 5-year look-back rule
Net sec 1231 losses
Then section 1231 gains and losses treated as ordinary gains and losses
Means they’re fully deductible in the current year
Five-year look-back rule
Any section 1231 gain is treated as ordinary gains to the extent of any nonrecaptured net sec 1231 losses from the previous five years
So section 1231 losses deducted as ordinary losses in the previous 5 years are recaptured by changing what would otherwise be a long term capital gain to ordinary income
Section 1231 loss from a passive activity
Subject to passive activity loss rules
Determining amount of nonrecaptured net section 1231 losses
Aggregate amount of net sec. 1231 losses for 5 preceding tax years
Vs
Any amounts recaptured as ordinary income in those tax years
Excess of nonrecaptured over previously recaptured is the net nonrecaptured loss
Adjusted net capital gain
ANCG
Net capital gain determined without regard to
- 28% rate gain (collectables and some sec. 1202 gain)
- unrecaptured section 1250 gain
Order in which net section 1231 gain is recharacterized as ordinary income under the 5-year lookback rule
1) net section 1231 gain in the 25% group (unrecaptured 1250 gain)
2) net section 1231 gain in the 20% or 15% group
Depreciable property and real property used in a trade or business held for one year or less
Neither capital assets nor section 1231 property
All gains and losses ordinary
Items specifically excluded from section 1231 property
Inventory
Government publications received other than by purchase
Patents
Inventions
Designs
Secret formulas
Copyrights
Literary, musical, or artistic compositions
Letters or memorandums
Property held by its creator
Section 631
Allows taxpayers to ELECT to treat the cutting of timber as a sale or exchange of said timber IF:
- taxpayer owns the timber or holds the contract right on the first day of the year or for more than one year
- timber is cut for sale or for use in taxpayers trade or business
Computing gain or loss on cutting of timber treated as sale of timber
Comparing timber’s adjusted basis for depletion with it’s FMV on the first day of the tax year in which it is cut
Any difference between this FMV and actual sale price is an ordinary gain or loss
If election is made to treat the cutting of timber as sale or exchange
Timber is the section 1231 property and gains and losses are 1231 gains and losses
If no election tax treatment depends on if timber is held for sale in course of trade or business or if held for investment or for use in trade or business
Disposal of coal or domestic iron ore
If disposed of while retaining an economic interest in it the disposal must be treated as sale of section 1231 property
Economic interest in minerals
Owned when an individual acquired by investment any interest in mineral in pace and seeks a return of capital from the income derived from its extraction
Livestock
ONLY MAMMALS
When livestock is section 1231 property
Livestock held for 12 months or more for draft, breeding, dairy, or sporting purposes.
Cattle and horses must be held for more than 24 months from acquisition to be section 1231 property
When are unharvested crops section 1231 property
Unharvested crop growing on land used in a trade or business IF both crop and land are sold at the same time to the same person and the land is held for more than one year
Not 1231 if seller retains any right or option to reacquire the land
Means that no deductions are allowed for expenses attributable to the production of the unharvested crops (cost of production must be capitalized)
Involuntary conversions of property used in trade or business
Generally treated as section 1231 gains or losses
Includes involuntary conversions of capital assets held in connection with a trade or business or in a transaction entered into for profit
As long as held for over one year
Condemnation of section 1231 property and capital assets
As long as held for over a year, treated as section 1231 gains and losses (as long as held in connection with trade, business, or a transaction entered into for profit)
Gains or losses from involuntary conversion due to fire, storm, shipwreck, other casualty, or theft
If losses exceed gains: not classified as 1231 gains and losses (ordinary)
If gains exceed losses: classified as section 1231 gains and losses
Steps for analyzing sec 1231 transactions
1) determine recognized gains or losses
2) determine if any gain must be recaptured under section 1245 and 1250 as ordinary income
3) determine if there are net sec 1231 gains or losses
4) if there is a net gain determined if there is any nonrecaptured net section 1231 loss
Determining net section 1231 gain or loss
Net together
- net casualty and theft gains from section 1231 property/ non-personal-use property held over 1 year (if net loss is ordinary loss)
- gains and losses from sale or exchange of section 1231 property
- gains and losses resulting from the condemnation of section 1231 property and non-personal-use capital assets held more than one year
Treatment of net section 1231 loss
All section 1231 gains and losses treated as ordinary losses and gains
Treatment of net section 1231 gain
All gains and losses treated as long term capital gains
Portion may be required to be recaptured as ordinary income under 5-year lookback rule
Section 1245 property
Certain property subject to depreciation, and in some cases, amortization.
- depreciable personal property
- automobiles
- livestock
- railroad grading
- single-purpose agricultural or horticultural structures
- intangible assets subject to amortization under sec 197
Generally not buildings (except for certain buildings placed into service between 1981-1986
Section 1245 recapture provisions
Any gain received from the disposition of section 1245 property must be treated as ordinary income to the extent of the total amount of depreciation/ cost recovery deductions allowed since Jan 1 1962
(Generally makes entire gain ordinary income)
Changes character not amount of the gain