Question

In the current year, Alan reported a $105,025 net §1231 gain and a $4,000 net capital loss. Assuming Alan reported $59,500 of nonrecaptured §1231 losses during the prior 5 years, what amount of Alan's net §1231 gain for the current year, if any, is treated as ordinary income?

• None of the choices are correct.

• $0.

• $59,500.

• $105,025.

• $45,525.

Answer 1

A loss on the sale of Section 1231 business property is treated as ordinary loss and can reduce ordinary income on the Taxpayer's return and is not subject to the capital loss limitations ($3,000 limitation for individuals or capital gain limitation for corporations).   However there is a Section 1231 recapture rule that if you sell business property at a gain and you have deducted ordinary losses due to the sale of Section 1231 property in that past five years then the Section 1231 gain that you recognize will be taxed as ordinary income, using the Taxpayer's ordinary income rate, and not the preferential 15% maximum capital gain rate.

Therefore $59500 nonrecapturing loss 1231 will be $59500 ordinary Income.