Property Transactions: Treatment of
Capital and Section 1231 Assets
SUMMARY OF CHAPTER
This chapter focuses on transactions involving capital gains and losses that are subject to special rules and
limitations. The chapter also contains the definition of Section 1231 assets, the netting procedures, and the rules for
recapture of depreciation under Sections 1245 and 1250.
Special Rules and Limitations on Transactions
The Taxpayer Relief Act of 1997 significantly changed the taxation of capital gains. Prior to 1997, capital gains
were divided into two categories: short-term capital gains and long-term capital gains. From 1991 until the 1997
changes, short-term capital gains ended up being taxed at ordinary income tax rates, which could be as high as 39.6
percent, while long-term capital gains were taxed at a maximum of 28 percent. To qualify as long-term capital gain
or loss, a taxpayer must have held the capital asset for more than one year; if the asset was held one year or less,
the capital gain or loss was short-term.
Congress wished to lower the maximum long-term capital gains tax rate to 20 percent in the 1997 Act.
However, Congress did not wish to make the lower rate available to all long-term capital gains, and the 1997 rules
divided long-term capital gains into three categories: collectibles gains and Section 1202 taxed gains at a maximum
rate of 28 percent, long-term capital gains taxed at a maximum rate of 25 percent, and long-term capital gains taxed
at a maximum rate of 20 percent.
To qualify for the 20 percent long-term capital gain tax rate, the capital asset had to be held for more than 12
months. For taxpayers in the 15 percent tax bracket, this long-term capital gains tax rate became 10 percent. Prior
to the Taxpayer Relief Act of 1997, there was no special long-term capital gains tax rate available to the lower tax
The 2003 Tax Act included a reduction in rates for long-term capital gains and qualified dividends to 15 percent
for the four highest tax brackets and 5 percent for the two lower brackets. The lower rates apply to sales and
dispositions of capital assets after May 5, 2003. The 15 percent rate on dividends applies to all qualified dividends
received in 2003 and later years.
The 28 percent long-term capital gains tax rate applies to collectibles held more than one year and to Section
1202 gains. Generally, collectibles (as defined in Code Sec. 408(m)) include works of art, rugs, antiques, metal,
gems, stamps, coins, and alcoholic beverages. However, certain newly minted gold and silver coins issued by the
federal government and coins issued under state laws are subject to the 15 percent tax rate even though such coins
generally qualify as “collectibles.Ä Section 1202 stock is certain small business stock held more than five years.
Gains on the disposition of Section 1202 stock qualify for a 50 percent exclusion. Stock qualifying for the exclusion