ExpertMedium1 markMultiple Choice
CPA · Question 66 · Area 5: Property Transactions
In Year 5, a business sells a machine (Section 1231 asset) for a ,000 gain. In Years 1-4, the business had net Section 1231 losses of ,000 that were deducted as ordinary losses. How is the Year 5 gain taxed?
In Year 5, a business sells a machine (Section 1231 asset) for a ,000 gain. In Years 1-4, the business had net Section 1231 losses of ,000 that were deducted as ordinary losses. How is the Year 5 gain taxed?
Answer options:
A.
,000 Long-Term Capital Gain
B.
,000 Ordinary Income
C.
,000 Ordinary Income; ,000 Long-Term Capital Gain
D.
,000 Ordinary Income; ,000 Long-Term Capital Gain
How to approach this question
Lookback Rule: Did you take 1231 ordinary losses in the last 5 years? If yes, you have to 'pay back' that benefit by treating current capital gains as ordinary income up to the amount of those past losses.
Full Answer
C.,000 Ordinary Income; ,000 Long-Term Capital Gain✓ Correct
Under the Section 1231 lookback rule, net Section 1231 gains must be treated as ordinary income to the extent of unrecaptured Section 1231 losses from the preceding 5 years.
Common mistakes
Treating the entire 1231 gain as capital gain.
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