Phillip owns rental real estate with an adjusted basis of $200,000. During the current year, he sells the property for $170,000.
I.If Phillip's rental activity is a trade or business, the loss is a Section 1231 loss.
II.If Phillip's rental activity is a production-of-income (investment) activity, the loss is a capital loss.

Question

Phillip owns rental real estate with an adjusted basis of $200,000. During the current year, he sells the property for $170,000.
I.If Phillip's rental activity is a trade or business, the loss is a Section 1231 loss.
II.If Phillip's rental activity is a production-of-income (investment) activity, the loss is a capital loss.
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Quizplus · Accepted Answer

Statement I is correct because Section 1231 of the Internal Revenue Code applies to depreciable property and real estate used in a trade or business, allowing losses to be treated as ordinary losses rather than capital losses. Statement II is correct because if the rental activity is considered an investment rather than a trade or business, the loss from the sale of the property would indeed be treated as a capital loss.

Phillip Owns Rental Real Estate with an Adjusted Basis of $200,000