Section 1231 losses - John R. Dundon II, Enrolled Agent
7842
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Section 1231 losses

Section 1231 losses

Code Sec. 1231 makes available the best of both worlds to businesses with a certain combination of capital gains and losses. Net gains from the disposal of Sec. 1231 property are taxed at capital gain rates, while net losses from the disposal of Sec. 1231 property are taxed as ordinary losses. If total Sec. 1231 gains exceed losses for the year, then all gains and losses are capital. If total losses exceed gains for the year, then all gains and losses are ordinary. Recapture rules apply.

Sec. 1231 property is depreciable property and real estate that are held for more than one year and used in the taxpayer’s trade or business. Sec. 1231 applies to gains and losses from: the sale or exchange of property used in a trade or business; the compulsory or involuntary conversion (from destruction, theft, seizure or government condemnation) of property used in a trade or business; and the compulsory or involuntary conversion of any capital asset held for more than one year in connection with the trade or business. Such property also includes timber and coal, livestock, and unharvested crops. Sec. 1231 does not include inventory and property held for sale to customers, or copyrights, artistic compositions, and letters.

 

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