What is 1231 gain?

The term "1231 gain" refers to a specific type of gain recognized by the Internal Revenue Service (IRS) in the United States. It is primarily associated with the sale of depreciable or real property used in a trade or business or held for investment purposes.

Here are some key points to understand about 1231 gain:

1. Definition: 1231 gain is the net gain realized from the sale, exchange, or involuntary conversion of certain business or investment property. It can include gains from the sale of real estate, machinery, equipment, and other depreciable assets.

2. Calculation: To determine the 1231 gain, the total gains from such transactions are reduced by any 1231 losses incurred during the tax year.

3. Tax Treatment: If the net result is a 1231 gain after considering all relevant transactions, it is subject to a more favorable tax treatment. It is treated as long-term capital gain, which generally carries a lower tax rate than ordinary income.

4. Recapture Rule: However, if there are net losses in a particular tax year instead of a gain, those losses are treated as ordinary losses (subject to ordinary income tax rates) rather than as capital losses. This is known as the "recapture rule."

5. Holding Period: For a gain to qualify as 1231 gain, the property must be held at least one year, although this requirement does not apply to involuntary conversions.

6. Section 1231 Loss: If there are net losses from sales or exchanges of business or investment property, these losses can only be deducted against other 1231 gains. If there is still an overall loss, it can be used to offset ordinary income.

7. Section 1245 and 1250 Property: Special rules apply to certain types of depreciable property called Section 1245 property (personal property, such as equipment, that is subject to depreciation) and Section 1250 property (real property, such as buildings). The treatment of gain or loss on these assets may differ from other 1231 property.

It is important to consult with a tax professional or CPA for specific details and guidance regarding the application of 1231 rules, as tax laws can be complex and subject to change.