The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last 5 years.

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The §1231 look-back rule is a provision in the tax code that recharacterizes any §1231 gains as ordinary gains if there have been net §1231 losses in the previous five years. This is done to prevent taxpayers from using §1231 losses to offset other types of income and then converting §1231 gains back into capital gains, which are taxed at a lower rate.

The §1231 Look-Back Rule Recharacterizes §1231 Gains If §1231 Losses