Milton Inc. recognized a $1,300 net Section 1231 loss in 2012. If Milton recognizes a $5,000 net Section 1231 gain in 2013, it must characterize $1,300 as ordinary income.

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According to the Section 1231 rules, when there is a net Section 1231 loss in one year and a net Section 1231 gain in the following year, the amount of the previous loss that can be characterized as ordinary income in the current year equals the lesser of the current year's net Section 1231 gain or the previous year's net Section 1231 loss. In this case, the previous year's net Section 1231 loss was $1,300 and the current year's net Section 1231 gain is $5,000, so $1,300 must be characterized as ordinary income in 2013.