ExpertMedium1 markMultiple Choice
CPA · Question 61 · Area IV: Property Transactions
In Year 5, a taxpayer has a §1231 gain of $20,000. In Year 1, they had a §1231 loss of $8,000 that was deducted as ordinary. No other §1231 transactions occurred in Years 2-4. How is the Year 5 gain characterized?
In Year 5, a taxpayer has a §1231 gain of $20,000. In Year 1, they had a §1231 loss of $8,000 that was deducted as ordinary. No other §1231 transactions occurred in Years 2-4. How is the Year 5 gain characterized?
Answer options:
A.
$20,000 Capital Gain
B.
$20,000 Ordinary Income
C.
$8,000 Ordinary Income, $12,000 Capital Gain
D.
$12,000 Ordinary Income, $8,000 Capital Gain
How to approach this question
Apply §1231(c) Lookback Rule. Current §1231 gain is ordinary to the extent of unrecaptured §1231 losses from the prior 5 years. $8,000 is ordinary; remainder ($12,000) is LTCG.
Full Answer
C.$8,000 Ordinary Income, $12,000 Capital Gain✓ Correct
IRC §1231(c). The $20,000 gain is treated as ordinary income to the extent of non-recaptured §1231 losses from the previous 5 years ($8,000). The remaining $12,000 is long-term capital gain.
Common mistakes
Forgetting the 5-year lookback rule.
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