What Are Section 1231 Transactions?

A section 1231 transaction includes property used in a trade or business, held more than one year on the date of sale or exchange. The holding period starts on the day after you received the property and includes the day you dispose of it.

Section 1231 transactions include:

1. Real or depreciable property:

Real property:

Real property includes land and buildings attached to land. Land is not depreciable. Buildings are depreciable and are referred to as section 1250 property after the section of the Internal Revenue Code.

Personal property:

The term personal refers to property that is movable, unlike land and buildings. Depreciable personal property includes, machinery, equipment, furniture, and fixtures and is referred to as section 1245 property.

Section 1245 is the section of the Internal Revenue Code that contains the rules for recapturing depreciation when a gain is realized on the sale or exchange of section 1245 property.

In addition to the personal property mentioned previously, section 1245 property may also include other tangible property used as an integral part of manufacturing, production, extraction, or furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services.

Depreciable personal property also includes amortizeable section 197 intangibles. These are intangible assets acquired in the acquisition of a business. For example, trademarks, trade names, and customer lists.

2. Sales or exchanges of leaseholds:

The leasehold must be used in a trade or business and held over one year.

3. Cattle and horses:

Sales or exchanges of cattle and horses held for draft, breeding, dairy, or sporting purposes and held for 24 months or more.

4. Livestock (excluding poultry):

Sales or exchanges of other livestock, excluding poultry.

The livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or more.

5. Sales of exchanges of unharvested crops:

The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held over 1 year.

6. Cutting of timber:

The taxpayer elects to treat the cutting of timber as a sale under Section 631(a).

The taxpayer must have either owned the timber for over 1 year or held a contract right for more than 1 year to cut the timber.

7. Disposal of timber with an economic interest:

Disposal of timber held over 1 year before disposal that is treated as a sale or outright sale of timber under Section 631(b).

8. Disposal of coal or domestic iron ore with a retained economic interest:

Disposal of coal (including lignite), or iron ore mined in the United States held more than 1 year before disposal treated as a sale under Section 631(c).

9. Condemnations:

The condemned property must have been held over 1 year.

The property must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property (not property held for personal use).

10. Casualties and thefts:

The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (e.g., notes and bonds).

You must have held the property over 1 year.

If your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation.

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