Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses fromsection 1231 transactions. Their treatment as ordinary or capitaldepends on whether you have a net gain or a net loss from all yoursection 1231 transactions. Caution: If you have a gain from a section 1231 transaction, first determinewhether any of the gain is ordinary income under the depreciationrecapture rules (explained later). Do not take that gain into accountas section 1231 gain. Section 1231 transactions.The following transactions result in gain or loss subject tosection 1231 treatment. Sales or exchanges of real property or depreciablepersonal property. This property must be used in a trade orbusiness and held longer than 1 year. Generally, property held for theproduction of rents or royalties is considered to be used in a tradeor business. Depreciable personal property includes amortizablesection 197 intangibles (described in chapter 2under OtherDispositions). Sales or exchanges of leaseholds. The leaseholdmust be used in a trade or business and held longer than 1year. Sales or exchanges of cattle and horses. Thecattle and horses must be held for draft, breeding, dairy, or sportingand held for 2 years or longer. Sales or exchanges of other livestock. Thislivestock does not include poultry. It must be held for draft,breeding, dairy, or sporting and held for 1 year or longer. Sales or exchanges ofunharvested crops. Thecrop and land must be sold, exchanged, or involuntarily converted atthe same time and to the same person, and the land must be held longerthan 1 year. The taxpayer cannot keep any right or option to directlyor indirectly reacquire the land (other than a right customarilyincident to a mortgage or other security transaction). Growing cropssold with a lease on the land, though sold to the same person in thesame transaction, are not included. Cutting of timber or disposal of timber, coal, or ironore.The cutting or disposal must betreated as a sale, as described in chapter 2under Timberand Coal and Iron Ore. Condemnations.The condemned property musthave been held longer than 1 year. It must be business property or acapital asset held in connection with a trade or business or atransaction entered into for profit, such as investment property. Itcannot be property held for personal use. Casualties and thefts. These must have been a casualty to ortheft of business property, property held for the production of rentsand royalties, or investment property (such as notes and bonds). Youmust have held the property longer than 1 year. However, if yourcasualty or theft losses are more than your casualty or theft gains,neither the gains nor the losses are taken into account in the section1231 computation. For more information on casualties and thefts, seePublication 547, Casualties, Disasters, and Thefts (Business andNonbusiness). Property for sale to customers.A sale, exchange, or involuntary conversion of property held mainlyfor sale to customers is not a section 1231 transaction. If you willget back all, or nearly all, of your investment in the property byselling it rather than by using it up in your business, it is propertyheld mainly for sale to customers. Example.You manufacture and sell steel cable, which you deliver onreturnable reels that are depreciable property. Customers makedeposits on the reels, which you refund if the reels are returnedwithin a year. If they are not returned, you keep each deposit as theagreed-upon sales price. Most reels are returned within the 1-yearperiod. You keep adequate records showing depreciation and othercharges to the capitalized cost of the reels. Under these conditions,the reels are not property held for sale to customers in the ordinarycourse of your business. Any gain or loss resulting from their notbeing returned may be capital or ordinary, depending on your section1231 transactions. Treatment as ordinary or capital.To determine the treatment of section 1231 gains and losses,combine all your section 1231 gains and losses for the year. If you have a net section 1231 loss, Esbjerg cheap hotelsit isordinary loss. If you have a net section 1231 gain, it isordinary income up to the amount of your nonrecaptured section 1231losses from previous years. The rest, if any, is long-term capitalgain. Nonrecaptured section 1231 losses.Your nonrecaptured section 1231 losses are your net section 1231losses for the previous 5 years that have not been applied against anet section 1231 gain by treating the gain as ordinary income. Theselosses are applied against your net section 1231 gain beginning withthe earliest loss in the 5-year period. Example.Ashley, Inc., a graphic arts company, is a calendar yearcorporation. In 1997, it had a net section 1231 loss of $8,000. Fortax years 1999 and 2000, the company has net section 1231 gains of$5,250 and $4,600, respectively. In figuring taxable income for 1999,Ashley treated its net section 1231 gain of $5,250 as ordinary incomeby recapturing $5,250 of its $8,000 net section 1231 loss. In 2000 itapplies its remaining net section 1231 loss, $2,750 ($8,000 -$5,250) against its net section 1231 gain, $4,600. For 2000, thecompany reports $2,750 as ordinary income and $1,850 ($4,600 -$2,750) as long-term capital gain. Tax rate on capital gain.The tax rate on the net capital gain of an individual, estate, ortrust is determined by treating any ordinary income from a net section1231 gain as consisting of, first, any net section 1231 gain in the28% group, then any net section 1231 gain in the 25% group, andfinally any net section 1231 gain in the 20% group. Any long-termcapital gain is treated as consisting of any remaining net section1231 gain in each group. See Capital Gain Tax Rates inchapter 4. Example.The facts are the same as in the previous example, except that thecompany is operated by an individual as a sole proprietorship. The$4,600 net section 1231 gain for 2000 is the total of a $1,000 netsection 1231 gain in the 28% group and a $3,600 net section 1231 gainin the 20% group. The $2,750 treated as ordinary income consists ofthe $1,000 gain in the 28% group and $1,750 of the gain in the 20%group. The tax rate on the individual's net capital gain for 2000 isdetermined by including the $1,850 long-term capital gain in the 20%group.