Paul has a $45,000 net Section 1231 gain in the current tax year from his only property transaction.Last year he had a $12,000 net Section 1231 gain,but two years ago he had a $51,000 net Section 1231 loss.If he has no other property transactions in the current year,Paul will treat the net Section 1231 gain as:
A)$45,000 capital gain
B)$45,000 ordinary income
C)$39,000 ordinary income;$6,000 Section 1245 gain
D)$39,000 ordinary income;$6,000 long-term capital gain
E)None of the above

Question

Quizplus · Accepted Answer

Section 1231 gains and losses are classified as either ordinary income or long-term capital gains, depending on the net amount for the tax year in question.

In Paul's case, he had a net Section 1231 loss two years ago, so that loss will be carried forward to offset any Section 1231 gains in future years. Last year, he had a net Section 1231 gain of $12,000, but since it was less than the previous year's loss, it was treated as ordinary income.

This year, he has a net Section 1231 gain of $45,000. We first need to offset this gain with the previous year's loss:

$45,000 (current year gain) - $12,000 (previous year gain) - $51,000 (previous year loss carryover) = -$18,000

Since the net result is negative, the entire amount will be treated as ordinary income, and there will be no long-term capital gain. Specifically, $39,000 will be ordinary income, and $6,000 will be treated as a Section 1245 gain (a type of ordinary income for certain types of property).

Therefore, the answer is D: $39,000 ordinary income; $6,000 long-term capital gain.

Paul Has a $45,000 Net Section 1231 Gain in the Current