Review of
Property Dispositions
Dr. Richard Ott
Realized and Recognized
Gains (Losses) from
Property Sales or Exchanges
Realized Gains (Losses)
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Calculation:
Amount realized [IRC §1001(b)]
– Adjusted tax basis [IRC §1011]
= Realized gain (loss) [IRC §1001(a)]
Amount Realized
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Includes [IRC §1001(b)]:
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Cash received
FMV of property received
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Receivables
Services
Other property
Discharge of liabilities [Reg. §1.1001-2(a)]
With proper adjustments for real property taxes,
where applicable
Adjusted Tax Basis
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Calculation
Initial basis [IRC §1012 through §1015]
+/- Adjustments to basis [IRC §1016]
= Adjusted tax basis [IRC §1011]
Recognized Gains (Losses)
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“Except as otherwise provided in this subtitle”
the entire amount of any realized gains (losses)
are recognized [IRC §1001(c)]
Some Exceptions to IRC §1001(c)
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Corporate formations [IRC §351(a) and (b)]
Related party losses [IRC §267(a)]
Installment sale gains [IRC §453(a)]
Wash sale losses [IRC §1091(a)]
Tax-free reorganizations [IRC §354(a)]
Partial exclusion for gain from certain small
business stock [IRC §1202]
Like-kind exchanges [IRC §1031]
Involuntary conversion [IRC §1033]
Capital versus Ordinary
Gains (Losses)
Capital versus Ordinary Gains
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Corporate taxpayers are taxed at the same rates
on net capital gains (capital gains in excess of
capital losses) and ordinary gains [IRC §11]
Individual taxpayers are taxed at more favorable
rates on net long-term capital gains and on
qualifying dividend income [IRC §1(h)]
Capital versus Ordinary Losses

Corporate taxpayers can only deduct capital
losses against capital gains [IRC §1211(a)]
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Capital losses > capital gains carry back 3 years and
forward 5 years to offset net capital gains
[IRC §1212(a)]
Individual taxpayers can only deduct capital
losses against capital gains plus $3,000 per year
[IRC §1211(b)]

Capital losses not deductible in current year carry
forward indefinitely [IRC §1212(b)]
Capital versus Ordinary Losses
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For both corporate and individual taxpayers,
there is no general overall limitation on the
deductibility of ordinary losses but ordinary
losses may still be subject to limitations that
apply to all losses such as:
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Passive activity losses [IRC §469]
Carryovers in corporate acquisitions [IRC §381]
Carryovers and certain built-in losses after ownership
change [IRC §382]
Determining the Character of
Recognized Gains (Losses)
Categories of Assets
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All assets fall into one of the following three
categories:
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Capital assets
IRC §1231 assets
Ordinary assets
Capital Assets
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Capital assets include all assets except those
specifically listed in IRC §1221(a)
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Listed assets are IRC §1231 assets or ordinary assets
IRC §1231 Assets
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IRC §1231 assets include [IRC §1231(b)]:
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All depreciable property and real property used in a
trade or business and held for more than one year
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Includes amortizable intangible assets [IRC §197(f)(7)]
Certain livestock, unharvested crops, timber, coal, or
domestic iron ore
Ordinary Assets
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Ordinary assets are those assets excluded from
both capital assets [IRC §1221(a)] and IRC §1231
assets [IRC §1231(b)] and include:
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Inventory and/or property held primarily for sale to
customers in the ordinary course of the business
Accounts and notes receivable acquired in the ordinary
course of the business
Supplies used in the ordinary course of the business
Depreciable property and/or real property used in a
trade or business and held for 1 year or less
Certain copyrights, compositions, letters, or similar
property, government publications, commodities
derivatives, and hedging transactions
Character of Gains (Losses)
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Character of recognized gains (losses) from
sales or exchanges of property depends on the
category the asset falls into (capital, IRC §1231
or ordinary asset)
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However, several provisions in the Code override
these categories
Overriding Provisions
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Gains from sales or exchanges of depreciable property
between certain related taxpayers are ordinary gains
[IRC §1239]
Losses on qualifying small business stock is ordinary to
up to $50,000 ($100,000 MFJ) for qualifying individuals
[IRC §1244]
Depreciation recapture on sales or exchanges of
depreciable property is ordinary gain
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IRC §1245 for tangible personal property
IRC §1250 for real property
IRC §291(a) additional recapture on real property for
corporations
Depreciation Recapture – In General
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All depreciable assets that are sold or exchanged
at a recognized gain are subject to depreciation
recapture rules
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Depreciation recapture is ordinary gain, any gain
remaining may be capital or IRC §1231 gain
Depreciation recapture amount depends on the type
of asset and when it was placed in service
All depreciable assets fall into one of two categories:
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IRC §1245 property (tangible personal property) or
IRC §1250 property (real property)
Additional depreciation recapture under IRC §291(a)
applies to IRC §1250 property dispositions made by
corporate taxpayers
Depreciation Recapture – IRC §1245
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Applies to all depreciable tangible personal
property and amortizable intangible assets
Recognized gain on the disposition of IRC §1245
property is ordinary income up to the extent of
all previously recognized deductions for:
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MACRS
IRC §179
Bonus depreciation
Amortization
Depreciation Recapture – IRC §1245
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See Example 1 and Solution
See Example 2 and Solution
Depreciation Recapture – IRC §1250
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Applies to all depreciable real property
Recognized gain on the disposition of IRC §1250
property is ordinary gain up to the extent that
the sum of all previously recognized deductions
exceed the amounts that would have been
deducted using the straight-line method
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Since MACRS is calculated using the straight-line
method for real property placed in service after
12/31/86, the IRC §1250 depreciation recapture is
zero for these properties
Depreciation Recapture – IRC §291(a)
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Applies only to IRC §1250 property held by
corporate taxpayers
Additional depreciation recapture amount is
ordinary gain. Additional amount is the lesser of:
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20% X [Hypothetical IRC §1245 depreciation
recapture less actual IRC §1250 depreciation
recapture (if any)], or
20% X [Recognized gain less IRC §1250 depreciation
recapture (if any)]
Depreciation Recapture – IRC §1250
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See Example 3 and Solution
See Example 4 and Solution
Character of Gains (Losses)
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General Rule: Gains (losses) from sales or
exchanges of capital assets are capital gains
(losses) [IRC §1222]
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If the asset was held for 1 year or less, the gain (loss)
is short-term
If the asset was held for more than 1 year, the gain
(loss) is long-term
Caveat:
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Gains are ordinary to the extent of any required
depreciation recapture
Other overriding provisions may apply
Character of Gains (Losses)
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Recognized gains on the sale or exchange of
ordinary assets are ordinary gains [IRC §64]
Recognized losses on the sale or exchange of
ordinary assets are ordinary losses [IRC §65]
Character of Gains (Losses)
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When the sum of all IRC §1231 losses > the
sum of all IRC §1231 gains:
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All the IRC §1231 gains (losses) are ordinary gains
(losses) [IRC §1231 (a)(2)]
When the sum of all IRC §1231 losses < the
sum of all IRC §1231 gains:
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All the gains (losses) are capital gains (losses) [IRC
§1231 (a)(1)] except to the extent of:
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Depreciation recapture [IRC §1245 or IRC §1250 and §291]
IRC §1231 recapture [IRC §1231(c)]
IRC §1231 Recapture
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Applies if:
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Taxpayer has a net IRC §1231 gain (IRC §1231 gains
exceed IRC §1231 losses) in the current year and
Taxpayer reported a net IRC §1231 loss during any
one of the previous five years
IRC §1231 Recapture
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Current year net IRC §1231 gain is ordinary to
the extent of any non-recaptured net IRC §1231
loss over the previous five years [IRC §1231(c)]
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Non-recaptured net IRC §1231 loss = net IRC §1231
losses over the past 5 years less amounts already
recaptured during that time period
IRC §1231 Recapture – Example 1
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A taxpayer had the following net IRC §1231
gains (losses) over the past five years (there
were no IRC §1231 gains or losses for years
prior to 2001):
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2001
2002
2003
2004
2005
$(5,000)
$ 8,000
$(4,000)
$ 2,000
$(3,000)
For the 2006 taxable year, the non-recaptured IRC
§1231 loss over the previous five years is $5,000
IRC §1231 Recapture – Example 2
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A taxpayer had the following net IRC §1231
gains (losses) over the past five years (there
were no IRC §1231 gains or losses for years
prior to 2001):
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2001
2002
2003
2004
2005
$18,000
$0
$(15,000)
$(6,000)
$(3,000)
For the 2006 taxable year, the non-recaptured IRC
§1231 loss over the previous five years is $24,000
IRC §1231 Assets Netting Process
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See Example 5 and Solution
See Example 6 and solution
See Example 7 and solution