Taxes: Section 1231 Assets

Question 1

Taxes
Section 1231
General

Answer 1

Purpose
- create capital gain treatments for businesses
Definition
- used in a business
- held for 12 months
- include realty and depreciable property
- exclude capital assets, inventory, AR, copyrights, and government publications
- “sale or exchange” and “involuntary conversions”

Question 2

Taxes
Section 1231
Recapture

Answer 2

Recapture
- recapture of depreciation reduces the amount of gains eligible for 1231 treatment by recharacterizing them as ordinary income
Section 1245
- recharacterizes gains on personalty property (assets other than buildings) as ordinary income to extent of depreciation
Section 1250
- recharacterizes gains on realty property (buildings) as ordinary income to extent of accumulated depreciation in excess of straight-line depreciation. Get special tax rate (25%).

Question 3

Taxes
Section 1231
Shortcuts

Answer 3

• recapture does note recharacterize losses
• gain on sale of land held long term in a business are always 1231 assets since land does not depreciate
• gains on sale of business personalty held long term are OI unless sold for more than purchase price
• gains on sale of buildings held long term in a business are 1231 gains but will be taxed as ordinary to extent accelerated depreciation exceeds straightline with straightline taxed at 25%

Question 4

Taxes
Section 1231
Section 291

Answer 4

Section 291
Section 1245 recapture if Section 1245 property
Less: actual Section 1250 recapture
Excess amount
x20%
= Section 291 recapture

Question 5

Taxes
Section 1231
Netting

Answer 5

• S. 1231 gains > losses = Long Term Capital Gain

- S. 1231 gains

Question 6

Taxes
Section 1231
General

Answer 6

Sale $620
                  > $120 1231 Gain
Buy $500
                     > $180 Ordinary Income Subject to 25%
Basis $320

Other: Corporate carryback/forward capital gains are always short term