TAX: Section 1231 Assets

Question 1

What are section 1231 assets?

Answer 1

Assets used in a trade or business, held for more than one year.

Question 2

If you sell multiple 1231 assets at various gains and losses, how do you handle that?

Answer 2

Net the gains and losses just like capital gains/losses

Question 3

If section 1231 assets are damaged by casualty, how do you handle the gain or loss?

Answer 3

1) Take the casualty gains/losses together
- If the losses > Gains, treat them all as ordinary losses DO NOT NET THEM WITH OTHER SECTION 1231
- If the gains > losses, the net gain is combined with other Section 1231 gains and losses

Question 4

If Section 1231 gains exceed section 1231 losses , the net gain is treated as?

Answer 4

Long-Term Capital Gain

Question 5

If Section 1231 losses exceed section 1231 gains, the net loss is treated as?

Answer 5

Ordinary Loss

Question 6

What is the look back rules for 1231 gains?

Answer 6

Look back rules say “if you have a year where you have 1231 gains, you have to look back 5 years to see if you had net section 1231 losses. To the extent that you did, you need to treat that portion has ordinary income.

Question 7

What are the recapture rules? What are the two types of recapture rules?

Answer 7

Only applies to 1231 assets because they are depreciated

Types:

1) Section 1250 recapture- Realty (buildings)
2) Section 1245 recapture- All other assets

Question 8

What is the process for section 1245 recapture?

Answer 8

1) All depreciation is taken is subject to recapture as ordinary income
2) Amount not recaptured will be taxed as 1231 gain

EXAMPLE: MR. MONOPOLY SOLD EQUIPMENT USED IN HIS BUSINESS FOR $11,000. THE EQUIPMENT COST $10,000 AND MONOPOLY CLAIMED MACRS DEDUCTIONS TOTALING $4,000.

SL DEPRECIATION IF IT HAD BEEN USED WOULD HAVE BEEN $2,500. WHAT IS THE AMOUNT OF GAIN THAT SHOULD BE REPORTED UDNER SECTION 1231 AND 1245?

STEPS:  
1)
AMOUNT REALIZED:  $11,000
ADJUSTED BASIS:       6,000 
REALZIED GAIN:           5,000 (FIXED) 

2)
SECTION 1245 ORDINARY INCOME - 4,000
SECTION 1231 GAIN: 1,000 (THIS IS NOT A LTCG..YET..YOU STILL HAVE TO GO THROUGH THE NETTING PROCESS)

Question 9

What is the process for Section 1250 recapture (Individual)?

Answer 9

1) Excess depreciation over straight line is treated as 1250/Ordinary Income
2) Some of the gain, will be taxed at a maximum tax rate of 25%, which is the SL Depreciation claimed
3) Section 1231 Gain is whatever is left over

EXAMPLE: MR. MONOPOLY SOLD BUILDING USED IN HIS BUSINESS FOR $11,000. THE EQUIPMENT COST $10,000 AND MONOPOLY CLAIMED MACRS DEDUCTIONS TOTALING $4,000.

SL DEPRECIATION IF IT HAD BEEN USED WOULD HAVE BEEN $2,500. WHAT IS THE AMOUNT OF GAIN THAT SHOULD BE REPORTED UDNER SECTION 1231 AND 1250?

Total Gain is $5,000.

1) 
SECTION 1250 ORDINARY INCOME: 
Actual depreciation:  $4,000
S/L:   (2,500) 
Excess:  $1,500

Question 10

What is the process for section 1250 recapture (corporation)?

Answer 10

1). Rules are the same for individuals except:

• Additional depreciation is recaptured to the extent of 20% multiplied by:
• Recaptured if the property was section 1245 property
  Less: Section 1250 depreciation recapture

EXAMPLE: MONOPOLY CORP SOLD BUILDING USED IN HIS BUSINESS FOR $11,000. THE EQUIPMENT COST $10,000 AND MONOPOLY CLAIMED MACRS DEDUCTIONS TOTALING $4,000.

SL DEPRECIATION IF IT HAD BEEN USED WOULD HAVE BEEN $2,500. WHAT IS THE AMOUNT OF GAIN THAT SHOULD BE REPORTED UDNER SECTION 1231 AND 1250?

SECTION 1250:
Excess: $1500

SECTION 291: 
Section 1245:  4,000
Section 1250:  1500 
Difference:   2500
Multiply by:  20% 
Equals 500