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Unformatted text preview: C HAPTER S EVENTEEN PROPERTY TRANSACTIONS: DISPOSITIONS OF TRADE OR BUSINESS PROPERTY SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 17-1 Section 1231 property consists of depreciable property and land used in a trade or business or for rental and held for more than one year. In addition, timber, coal, and iron ore to which § 631 applies, unharvested crops sold along with land that is § 1231 property, and certain livestock are included. [See pp. 17-3 through 17-6 and § 1231(a).] 17-2 Section 1231 assets are assets other than capital assets and ordinary income or loss assets (and held for more than one year). Specifically excluded by statute are properties held primarily for sale to customers in the ordinary course of a trade or business or includible in inventory if on hand at the end of a taxable year. Other excluded assets are copyrights and similar properties and certain government publications acquired other than by purchase. All of these are examples of ordinary income or loss property. [See p. 17-3 and § 1231(b)(1).] 17-3 The first step is to net casualty and theft gains and losses related to (1) capital assets held for either business or investment purposes for more than one year and (2) § 1231 assets. If a net gain results, the gain is treated as a gain from the sale of a § 1231 asset. If a net loss results, § 1231 is not applicable and each gain and loss is treated separately without regard to § 1231. The next step is to combine the (1) net gain, if any, from above with (2) other involuntary conversions that involve, for either business or investment purposes, capital assets held for more than one year and § 1231 assets and (3) sales or exchanges of § 1231 assets. If a net gain results, it is treated as a long-term capital gain. If a net loss results, it is treated as an ordinary loss. Gains from the disposition of § 1231 assets are subject to this treatment only after taking into account any depreciation recapture. Personal use assets are not included in this process. (See Exhibit 17-1 and pp. 17-7 through 17-11.) 17-4 A net § 1231 gain (after the netting process and the lookback rule) is treated as a long-term capital gain. It is first combined with other long-term capital gains and losses. If an overall net long-term capital gain results, it is combined with other long-term capital gains and offset against long-term capital losses and net short- term capital losses, including any carryovers from prior years. (See pp. 17-7 through 17-11.) 17-5 A net § 1231 loss (after the netting process) is treated as an ordinary deduction. As a result, the loss is fully deductible without limit in arriving at A.G.I. Since a net § 1231 loss is treated as an ordinary loss, it may also be used to generate or increase a net operating loss. (See pp. 17-7 through 17-11.) 17-6 Casualty and theft gains and losses related to § 1231 assets and capital assets held in connection with a trade or business are combined in the first step of the §...
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