Paul has a $45,000 net Section 1231 gain in the current tax year from his only property transaction.Last year he had a $12,000 net Section 1231 gain, but two years ago he had a $51,000 net Section 1231 loss.If he has no other property transactions in the current year, how will Paul treat his net Section 1231 gains this year?
A)$45,000 long-term capital gain
B)$45,000 ordinary income
C)$39,000 ordinary income; $6,000 Section 1245 gain
D)$39,000 ordinary income; $6,000 long-term capital gain

Question

Quizplus · Accepted Answer

The $45,000 net Section 1231 gain this year is treated as a long-term capital gain. However, because Paul had a $51,000 net Section 1231 loss two years ago, the net Section 1231 gain this year to the extent of the prior loss ($51,000) is treated as ordinary income. Since he had a $12,000 net Section 1231 gain last year, this reduces the $51,000 loss carryover to $39,000. Therefore, $39,000 of this year's gain is treated as ordinary income due to the recapture rule, leaving $6,000 ($45,000 - $39,000) to be treated as long-term capital gain.

Paul Has a $45,000 Net Section 1231 Gain in the Current