Question

A taxpayer has the following gains and losses from property transactions in the current year: $40,000 Section 1231 gain $25,000 Section 1231 loss $12,000 Long-term capital gain $9,000 Short-term capital loss.

How are these transactions treated for tax purposes if the taxpayer recognized an $8,000 Section 1231 loss in the previous tax year?

1. $18,000 long-term capital gain
2. $15,000 Section 1231 gain; $3,000 short-term capital loss
3. $8,000 ordinary income from look-back; $10,000 long-term capital gain
4. $8,000 ordinary income from look-back; $7,000 Section 1231 gain; $3,000 long-term capital gain

can someone explain why the answer is number 3

Answer 1

Answer -

Step - (1) - Information Given -

A taxpayer has the following gains and losses from property transactions in the current year:

• $40000 Section 1231 gain
• $25000 Section 1231 loss
• $12000 Long-term capital gain
• $9000 Short-term capital loss.

Taxpayer recognized an $8000 Section 1231 loss in the previous tax year.

.

Step - (2) - Analysis and Conclusion -

As per section 1231 of the U.S. Internal Revenue Code -

Net Section 1231 gains are treated as long-term capital gain income, unless there are unrecaptured Section 1231 losses during the look-back period.

The amount of unrecaptured Section 1231 losses during the look-back period is treated as ordinary income.

In the given case,

Ordinary income = $8000 (that is the Section 1231 loss during the previous tax year).

Long-term capital gain =

Section 1231 gain	$40000
Less: Section 1231 loss	($25000)
Add: Long-term capital gain	$12000
Less: Short-term capital loss	($9000)
Less: Ordinary income	($8000)
Net Long-term capital gain	$10000

Therefore, Option - (3) $8000 ordinary income from look-back; $10000 long-term capital gain, is Correct.