Question

Terry sells two pieces of equipment used in his business. Both are Section 1231 assets. One results in a $5,000 gain and the other in a $12,000 loss. Assuming there is no Section 1245 recapture, how are these transactions treated in Terry's tax return?

Answer 1

A net § 1231 gain has to be treated as ordinary income if there are no § 1245 recaptures. The same logic applies to net § 1231 losses, they must be deducted as ordinary losses.

Therefore, Terry's income would increase by $5,000 and decrease by $12,000 resulting in a net deduction of $7,000.