Section 1231 Assets Flashcards
Casualty G/L: What is the first step of netting process?
Net all casualty and theft gains and losses on property held for more than 1 yr.
Casualty G/L: What is the second step of netting process?
If the losses exceed gains, treat all as ordinary losses and gains and don’t net them with other Sec. 1231 G/L.
If the gain exceed losses, the net gain is combined with other sec. 1231 G/L.
How is the net gain is treated? Net losses?
G: LT capital gain (subject to a loopback limit for losses during the previous 5 yrs).
L: Deductible as an ordinary loss.
What is lookback provision?
The net Sec. 1231 gain must be offset by net Sec. 1231 losses from 5 preceding yrs that have not been recaptured.
To the extent of these losses, the net Sec. 1231 gain is treated as ordinary income.
Which types of assets does recapture rules (depreciation claim taken is recaptured as ordinary income) apply to?
Only sec. 1231 assets because they are the only ones depreciable.
What are 2 types of recaptures?
- Sec. 1250 recapture - Realty (land and assets permanently attached to land), but land is not depreciable, so only applies to buildings.
- Sec. 1245 recapture - Personalty (assets other than rely)
Sec. 1245 assets: Treatment of gain? The amount not recaptured?
G: Subject to recapture as Sec. 1245 ordinary income.
Not recaptured: Categorized as Sec. 1231 gains.
Does recapture change the amount of realized/recognized gain?
Never. It’s fixed.
What is Sec. 1250 recapture?
Only the excess of actual depreciation over straight-line depreciation is subject to recapture as Sec. 1250 ordinary income.
What is 25% recapture rule?
Under Sec. 1250 assets, the portion of gain could be taxed at 25% - usually the straight-line depreciation on the assets.
Then, remaining amount of realized gain will be Sec. 1231 gain.
Sec. 1250 recapture: Corporations: will straight-line depreciation be taxed at 25% as individuals?
No.
Sec. 1250 recapture: Corporations: Rule?
Additional depreciation is recaptured to the extent of 20% multiplied by:
*Recapture if the property was Sec. 1245 property
*Less: Sec. 1250 depreciation recapture (Sec. 1250 ordinary income).
The result = Sec. 291 ordinary income.
The remaining becomes Sec. 1231 gain.
Sec. 1245 recapture: Corporations?
Same as individuals.
What form is sale of Sec. 1231 assets reported on?
Form 4797.
Lookback ex: Characterize Sec. 1231 gain;
Yr 1: Sec. 1231 loss $10,000. Yr 2: Sec. 1231 loss $15,000.
Yr 3: Sec. 1231 gain $75,000.
Ordinary income: $25,000
Sec. 1231 gain: $50,000.
