Section 1231 Assets

Section 1231 Assets Tax Form

Form 4797

Section 1231 is designed to

provide capital gain treatment to a net gain generated from transactions involving involuntary conversions and the disposition of business assets.

The scope of section 1231 is determined by the

nature of the asset and the type of disposition.

Section 1231 applies to the

sale or exchange of "section 1231" assets.

Define Section 1231 Assets

Assets used in a business and held for over 12 months (long-term). Section 1231 assets include realty and depreciable property but excludes capital assets, inventory, accounts receivable, copyrights, and government publications.

Section 1231 also applies

to all involuntary conversions of business assets.

Recapture

First stage of netting is recharacterization of a portion of gains attributed to accumulated depreciation (called recapture of depreciation).

Recapture of depreciation reduces

the amount of gains eligible for Section 1231 treatment by recharacterizing the gain as ordinary income. There are two types of recapture: Section 1245 and Section 1250.

Section 1245 recapture" recharacterizes gains on

personalty as ordinary income to the extent of accumulated depreciation.

Section 1250 recapture" is recapture of accumulated accelerated depreciation on

buildings in excess of straight-line depreciation as ordinary income.

For buildings owned by individuals

unrecaptured Section 1250 gains" recharacterizes gains on realty as eligible for a special (25%) tax rate to the extent of accumulated straight-line depreciation.

Define Section 1245 Recapture

Refers to depreciable personalty (assets other than buildings).

Define Section 1250 Recapture

Applies to depreciable real estate (buildings).

Recapture does not recharacterize

losses.

Gains on the sale of land held long-term in a business are always

1231 gains since land is not depreciable.

Gains on the sale of business personalty held long-term are

ordinary income, unless sold for an amount greater than the original purchase price.

Gains on the sale of buildings held long-term in a business are

1231 gains but will be taxed as ordinary to the extent of accelerated depreciation in excess of straight-line with the straight-line depreciation being taxed at a 25% rate.

For Section 1245 property (personalty), the rules for a corporation

are the same as for an individual.

For Section 1250 property (buildings) for corporations, the accumulated depreciation claimed in excess of straight-line depreciation

is subject to being recaptured as ordinary income.

Section 291 recapture also applies

to corporations.

Section 291 depreciation recapture applies only to

buildings

Section 291 depreciation recapture computed?

Section 1245 recapture IF the property had been Section 1245 property
- The actual Section 1250 recapture
= excess amount * 20%
= section 291 recapture

Recapture computation for Partnerships and S Corporations

is the same as for individuals.

All Section 1231 gains and Section 1231 losses

are netted.

To the extent that Section 1231 gains exceed section 1231 losses,

the net gain is treated as a long-term capital gain.

If Section 1231 losses exceed section 1231 gains

the loss is deductible as an ordinary loss (subject to a lookback limit during the previous five years).

The lookback provision states

that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income.

If Section 1231 losses exceed section 1231 gains

...

Sales of business property, including depreciation recapture, are reported

Form 4797, Sales of Business Property.