In the current year, Alan reported a $104,950 net §1231 gain and a $4,000 net capital...

In the current year, Alan reported a $104,950 net §1231 gain and a $4,000 net capital loss. Assuming Alan reported $54,000 of nonrecaptured §1231 losses during the prior 5 years, what amount of Alan's net §1231 gain for the current year, if any, is treated as ordinary income?

Multiple Choice

$50,950.
$104,950.
$54,000.
None of the choices are correct.
$0.

Solutions

Expert Solution

Per IRS, if a taxpayer has Section 1231 losses in the previous five years, the loss can be set off against the current year Section 1231 gain. The amount of such loss that is applied against the current year Section 1231 gain is reported as Ordinary Income. The remaining gain after adjusting for the losses is the Long term capital gain.

Hence, based on the above observation, Alan would recognize ordinary income upto the Non recaptured section 1231 losses of the prior 5 years. Hence, the correct answer is Option C - $54,000.

Option A is incorrect based on the above calculation.

Option B is incorrect as the total $104,950 is the net section 1231 gain. However, ordinary income is recognized only upto the maximum nonrecaptured losses of the preceding 5 years.

Option D is incorrect as we have the answer at Option C.

Option E is incorrect as Alan would be eligible to treat the nonrecaptured losses of the preceding 5 years as "ordinary income" during the current year.

Please let me know if you have any questions via comments and all the best :)

ekkarill92 answered 1 year ago

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