[Anonymous]

Folly Corporation, which was formed in 2009, had 40,000 of net Section 1231 gain for its 2013 calendar year. Its net Section 1231 gains and losses for its 3 preceding tax years were as follows:

Year // Section 1231 results

2010: loss of 15,000

2011: loss of 20,000

2012: gain of 5000

As a result, Folly Corporation’s 2012 net Section 1231 gain would be characterized by:

A. LTCG of 40,000

B. LTCG of 10,000, ordinary income of 30,000

C. LTCG of 5000, ordinary income of 35,000

D. LTCG of 30,000, ordinary income of 10,000

B. A net Sec. 1231 gain must be treated as ordinary income to the extent of the taxpayer’s nonrecaptured net Sec. 1231 losses for its 5 preceding tax years. Since the nonrecaptured net Sec. 1231 losses for 2010 and 2011 total ($15,000 + $20,000) – $5,000 = $30,000, only $10,000 of the $40,000 net Sec. 1231 gain for 2013 will be treated as long-term capital gain.

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Why are you retroactively going back to past years to determine what is the gain or loss? 2012 already has a 5000 section 1231 gain, so why don’t you just report a LTCG of 5000?

[Anonymous]

The recapture rule: you net the 1231 gains and losses for a tax year. If you have a net gain its treated as a LTCG. If you have a net loss, you treat it as an ordinary loss. So, the rule is you have to recapture 1231 gains as ordinary if you have had a 1231 (ordinary) loss in the past 5 years. Likewise, for 1245 property you have to recapture a gain as ordinary to the extent of the depreciation claimed and the remainder is a LTCG.

Year // Section 1231 results

2010: loss of 15,000 – ordinary loss

2011: loss of 20,000- ordinary loss

2012: gain of 5,000- ordinary gain……… recaptured from 2010 leaving $10,000 ordinary loss nonrecaptured.

This leaves $30,000 ordinary section 1231 losses that need to be recaptured as ordinary since they fall within the past 5 years of 2013.

2013: $40,000 gain (recapture remaining $30,000 as ordinary, leaving $10,000 for LTCG treatment).

I hope that explains it well.

[Anonymous]

The recapture rule: you net the 1231 gains and losses for a tax year. If you have a net gain its treated as a LTCG. If you have a net loss, you treat it as an ordinary loss. So, the rule is you have to recapture 1231 gains as ordinary if you have had a 1231 (ordinary) loss in the past 5 years. Likewise, for 1245 property you have to recapture a gain as ordinary to the extent of the depreciation claimed and the remainder is a LTCG.

Year // Section 1231 results

2010: loss of 15,000 – ordinary loss

2011: loss of 20,000- ordinary loss

2012: gain of 5,000- ordinary gain……… recaptured from 2010 leaving $10,000 ordinary loss nonrecaptured.

This leaves $30,000 ordinary section 1231 losses that need to be recaptured as ordinary since they fall within the past 5 years of 2013.

2013: $40,000 gain (recapture remaining $30,000 as ordinary, leaving $10,000 for LTCG treatment).

I hope that explains it well.

[Author]

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