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Capital gain or loss results from the sale or exchange of a capital asset; Dispositions of capital assets other than

by sale or exchange
do not result in capital gain or loss: Recognized gain or loss is ordinary in character
ordinary the normal course of business–all other assets (not capital, not §1231, held ≤ 1 year): Inventory, A/R, supplies,
Capital sales of assets that are not in the normal course of business
-Asset held by a firm for long-term investment rather than for active business or commercial use: investment
securities, investment land
- Generally, investment and personal use assets nondepreciable business personalty
-Equity and creditor interest in other firms: stocks, bonds, partnership interests, marketable securities.
-Self-created intangible assets: contracts, technological processed and patents
§1231 trade or business assets held > 1 year: equipment, business realty(land, building ,machinery, warehouse)
 Treatment of excess of capital loss over capital gain (net capital loss)
Individuals Corporations
Deduction for net Can deduct $3,000 of net loss per year against ordinary No deduction
loss income

Carry forward indefinitely back 3years and forward 5 years against capital gains
Tax tate preferential tax rates on long-term capital gain Pay tax at regular rates: Capital gains are preferred to
1)Gains and losses from sales and exchanges of capital ordinary income because capital gains absorb capital
losses
assets held for more than 12 months are long-term
2)0%, 15%, 25%, and 28% preferential rates

 Section 1231 Assets: real or depreciable/amortizable properties used in a business


 Treatment of Sec1231 gains/losses
General rule:
1) Gains and losses for the year are netted
2) Net gain is treated as capital gain
3) Net loss is ordinary (fully deductible)
 Exceptions to Sec 1231 gains/losses rule
Sec 1231 loss lookback rule
 If a corporation has had a net Sec1231 loss during any of the last 5 years, then any Sec1231 gain is ordinary to the extent
of prior period net Sec1231 unrecaptured loss.
Sec 1245--full For sales of depreciable personalty and gain is characterized as ordinary to the extent of accumulated
recapture amortizable intangibles depreciation (including any Sec 179 expense deduction)
Sec 291--20% rule ----applied to business realty(building) that Recapture 20% of amount (full recapture gain - partial recapture
by corporation has been depreciated gain)
----significant for sales of buildings placed The total ordinary income= the recapture gain under 1250 and
in service after 1986 291

 Convention
1) Half year(personality----assets with recovery periods from 3 to 20 years) Table 7.2

2) Exception: Mid-quarter (personality) Appendix: if more than 40% (dollars term) of the assets are placed in the last 3 months of the
year (applied to all the assets)
3) Mid-month (Realty--assets with recovery periods of 25,27.5,30 or 39 years) Table 7.3 /7.4
Q1: Is the gain from the disposition of §1245 or
§1250 property?

§1245 §1250 (all other realty)


(largely Q2: Is the taxpayer an individual or
personalty) a corporation?

Individual Corporation

Pre-‘87 Post-‘86 Pre-‘87 Post-‘86

Ord. Gain =
lesser of
Ord. Gain = excess of
Ord. Gain =
lesser of accumulated
lesser of
accumulated depreciation
excess of
depreciation over
accumulated
OR straightline
depreciation
realized gain OR
over straightline
OR realized gain
realized gain

a.k.a. Partial
a.k.a. Full
Recapture
Recapture Ord. Gain =
Ord. Gain =
20%
20%
recapture* recapture*

Remaining Gain Remaining Remaining


Remaining gain
gain is is gain is gain is
is
§1231 §1231 §1231 §1231
§1231
§1231 Gains from §1231 Losses from
various asset sales various asset sales

Depreciation Remainder of
Recapture §1231 Gains
For §1245 Property:
Gain is ordinary up to
100% of depreciation
taken (a.k.a. full recapture
gain)

For pre-1987 §1250


Property: Net together
Gain is ordinary up to
excess of accelerated
depreciation taken over
straight-line depreciation
(a.k.a. partial recapture
gain)

For corporate-owned
§1250 property: Resulting Resulting
OR Net Loss
Gain is ordinary up to 20% Net Gain
x [excess of full recapture
gain over partial recapture
gain]*
also
Loss known
Lookback as
Rule

Gain is ordinary
up to ordinary
losses claimed in
prior 5 years
Net
§1231
Net
Losses
§1231
Gains

Ordinary Gain Ordinary Loss


Capital Gain