Question

Hans runs a sole proprietorship. Hans has reported the following net §1231 gains and losses since he began business. Net §1231 gains shown are before the lookback rule. (Leave no answer blank. Enter zero if applicable.)

	Net §1231
Year	Gains/(Losses)
Year 1	$(69,500)
Year 2	17,250
Year 3	0
Year 4	0
Year 5	11,800
Year 6	0
Year 7 (current year)	52,250

a. What amount, if any, of the year 7 (current year) $52,250 net §1231 gain is treated as ordinary income?

Ordinary income

$

b. Assume that the $52,250 net §1231 gain occurs in year 6 instead of year 7. What amount of the gain would be treated as ordinary income in year 6?

Ordinary income

$

Answer 1

Solution:
a.) 0 (Zero)
Explination: Section 1231 Capital loss can be carryforward upto 5 years In this case after carryforward to 5 years, In year 7, entire $52,250 Net 1231 gain will be recognized as Capital gain.
No Ordinary Income Will be recognized.

b.) $40,450
Explination: Ordinary Gain = Non-recaptured §1231 Losses of Previous 5 Years that are offset by a §1231 gain in the current year
=$(69,500)+$17,250+$11,800
=$40,450

Long-Term Capital Gain = Net §1231 Gain – Non-Recaptured §1231 Losses of Previous 5 Years Currently Taxed as Ordinary Gain.
=$52,250 - $40,450
=$11,800
(Year 7 - Year 5), in this case ($52,250 - $11,800) which equals $40,450.