Example of Net Section 1231 Computation

In tax year 2013 you sell two pieces of equipment (section 1245 property). We'll call them: Property A and Property B. You make a profit on Property A because it is a unique piece of equipment, and a loss on Property B.

Property A:

  • Selling price: $20,000
  • Basis before depreciation adjustment: $10,000
  • Depreciation claimed through current year: $2,000
  • Adjusted basis after subtracting depreciation: $8,000

Property B:

  • Selling price: $3,000
  • Basis before depreciation adjustment: $5,000
  • Depreciation claimed through current year: $1,000
  • Adjusted basis after subtracting depreciation: $4,000

Net section 1231 gains and losses for the previous five years:

  • 2008: ($1,500)
  • 2009: $500
  • 2010: ($3.000)
  • 2011: -0-
  • 2012: -0-
Section 1231 Computation
Property A      
Selling Price   $20,000  
Basis before depreciation $10,000    
Less: Depreciation 2,000    
Adjusted Basis   ($8,000)  
Gain on Property A     $12,000
       
Property B      
Selling Price   $3,000  
Basis before depreciation $5,000    
Less: Depreciation 1,000    
Adjusted Basis   ($4,000)  
Loss on Property B     (1,000)
       
Net Gain on Property A and B     $11,000
Less: Recaptured depreciation     (2,000)
Section 1231 gain
The part of the gain that exceeds recaptured depreciation.
    $9,000
How to Report the $11,000 Gain      
Recaptured depreciation for Property A:
Report as Ordinary income in Part II of Form 4797

Note: Property B had a loss, therefore, no recapture.
  $2,000  
Recaptured Net section 1231 losses for the previous five years:
Report as Ordinary income in Part II of Form 4797
2008 ($1,500), 2009: $500, 2010 ($3,000):
  4,000  
Portion of Gain Reported as Ordinary Income
Part II of Form 4797
    $6,000
Portion of section 1231 gain Gain Reported as Long-Term Capital Gain ($9,000 minus $4,000)

Carry the gain from line 9 of Form 4797 to Schedule D as a long-term capital gain .
    $5,000

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