Question

7.

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Hans runs a sole proprietorship. Hans reported the following net §1231 gains and losses since he began business: (Leave no answer blank. Enter zero if applicable.)

	Net §1231
Year	Gains/(Losses)
Year 1	$(73,500)
Year 2	19,250
Year 3	0
Year 4	0
Year 5	13,400
Year 6	0
Year 7 (current year)	54,250

a. What amount, if any, of the year 7 (current year) $54,250 net §1231 gain is treated as ordinary income?

Ordinary income

?

b. Assume that the $54,250 net §1231 gain occurs in year 6 instead of year 7. What amount of the gain would be treated as ordinary income in year 6?

Ordinary income

?

Answer 1

Part A

Year	net §1231 gains (losses)	recaptured /nonrecaputured  §1231 losses	notes	ordinary income	LTCG
Year 1	(73500)	0 (127750)	Loss is ordinary Non recaptured losses	(73500)
Year 2	19250	19250 (54250)	Gain is ordinary Non recaptured losses	19250
Year 3	0	0 (54250)	Non recaptured losses
Year 4	0	0 (54250)	Non recaptured losses
Year 5	13400	13400 (40850)	Gain is ordinary Non recaptured losses
Year 6	0	0 0	Non recaptured losses only carry forward 5 years)
Year 7	54250	54250	54250 is §1231		54250

After applying the §1231 five-year look back rule, the entire $50,000 is long-term capital gain. Net §1231 gain treated as ordinary Income is $0.

Part B

Year	net §1231 gains (loss)	recaptured / nonrecaputured losses  §1231	notes	ordinary	LTCG
Year 1	(73500)	0 (73500)	Loss is ordinary Non recaptured losses	(73500)
Year 2	19250	19250 (54250)	Gain is ordinary Non recaptured losses	19250
Year 3	0	0 (54250)	Non recaptured losses
Year 4	0	0 (54250)	Non recaptured losses
Year 5	13400	13400 (40850)	Gain is ordinary Non recaptured losses
Year 6	54250	40850 13400 0	gain is ordinary §1231 Nonrecaputured losses only carry forward 5 years	40850	13400

After applying the §1231 five-year look back rule, $40,850 is ordinary income and $13400 is long-term capital