J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Section 1231 Gains and Losses

Certain assets used in business are granted special tax treatment. This treatment seeks to provide a win-win situation for a business. If a sale or other disposition of these assets (called Section 1231 property) results in a net gain, the gain can be treated as capital gain. If a net loss results, the loss is an ordinary loss.

Section 1231 property

Property held for more than 1 year and used in a business or held for the production of rents or royalties.

Examples of Section 1231 property include:

• Real property and depreciable personal property (such as equipment)
• Leaseholds
• Timber, coal, and iron ore
• Certain livestock and unharvested crops

Gains or losses due to casualty, theft, or condemnation may also be treated as Section 1231 gains or losses if the property was held for more than 1 year. Also, the payment from a manufacturer to a distributor to cancel the distributor agreement is treated as a long-term capital gain, provided the distributor made a substantial capital investment in the distributorship and the investment is reflected in physical assets.

Section 1231 property does not include:

• Inventory or other property held for sale to customers
• Copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property created by your efforts
• Government publications

Determining Section 1231 Gains or Losses

You must use a netting process to determine your Section 1231 gains or losses. This means combining all ...