In tax year 2020 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:
Property B:
Net section 1231 gains and losses for the previous five years:
| 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 2015 ($1,500), 2016: $500, 2017 ($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 |