Question

23. Hurko, LP was formed in 2006 and adopted a calendar year. Here is a schedule of Hurko’s net Section 1231 gains and (losses) reported on its tax returns through 2011. 2006 2078 2008 2009 2010 2011 -0- (3,800) 9,040 (15,900) -0- -0- In 2012, Hurko recognized a $25,000 gain on the sale of business land. How is this gain characterized on Hurko's 2012 tax return? A. $25,000 Section 1231 gain. B. $9,100 ordinary gain and $15,900 Section 1231 gain. C. $15,900 ordinary gain and $9,100 Section 1231 gain. D. $25,000 ordinary gain. E. None of the above.

Answer 1

C. 15,900 ordinary gain and $9,100 Section 1231 gain is the correct answer

	Amount
Section 1231 Gain	$25000
Section 1231 loss                                                                                                         (15900)
Section 1231 gain                                                                                                          NIL*
Remaining net section 1231 loss from prior 5 years	($15900)
Gain treated as ordinary income	$ 15900
Gain treated as long term capital	$ 9100

*Tutorial Notes:

The loss of $3800 has been fully recaptured in gain of $9040 and the remaining gain of $5240 has been taxed accordingly in 2008 as per IRS. Presently, the loss of $15900 is not recaptured in any succeeding gains and hence it is vital to our requirement.

As per provisions of IRS, If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain and report remaining gain as long term capital gain.

(Provisions from IRS)

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, it is ordinary loss.
• If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. The rest, if any, is long-term capital gain.

Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Therefore, if in any of your 5 preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period.