Milton Inc. recognized a $1,300 net Section 1231 loss in 2014. If Milton recognizes a $5,000 net Section 1231 gain in 2015, it must characterize $1,300 as ordinary income.

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When a taxpayer has a net Section 1231 loss in one year and a net Section 1231 gain in the following year, the previous year's loss is characterized as ordinary income up to the amount of the current year's net Section 1231 gain. In this case, Milton had a $1,300 net Section 1231 loss in 2014 and a $5,000 net Section 1231 gain in 2015, so $1,300 of the gain must be characterized as ordinary income to offset the previous year's loss.