Section 1231
•
•
Congress added this section to help taxpayers during the 1940’s
and it continues today.
Essentially,
– Net gains become capital, resulting in lower rates.
– Net losses become ordinary, resulting in deductibility.
• Recall that section 1211 strictly limits the deductibility of capital
losses.
TPs with net gains
benefit from low rates
and TPs with net losses
benefit from no limits on
deductibility.
© Steven J. Willis 2000
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Section 1231(b) Property
• 1231(b) defines the applicable property
– Depreciable property held > 1 year
– Real property (land, essentially) held > 1 year and used
in a trade or business
• But not PHPSCOCTB
Section 1221(a)(2)
excludes this
property from capital
asset status.
A common mistake among
students is to view this property
as thus ordinary property!
It fits in a middle category: 1231
property.
© Steven J. Willis 2000
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Two Main Steps of 1231
•
•
Step One:
– FIRE POT
Step Two
– HOTCH POT
If HOTCH POT is
negative, all
gains and all
losses are
ordinary!
Called the
“firepot” because
of this language.
Gains & losses from fire, storm,
shipwreck, other casualty
or theft of:
1.
2.
3.
© Steven J. Willis 2000
If FIRE POT is
negative, all
gains and all
losses are
ordinary.
TB property
TB LTCA
Transaction for Profit LTCA
NEGATIVE
POSTITIVE
Gains & losses from sale or
exchange of:
1.
2.
If HOTCH POT is
positive, all gains
and all losses are
LT capital.
NEGATIVE
TB property
Non-Fire Pot gains &
losses from involuntary
conversions of
1.
TB property
2.
TB LTCA
3.
For Profit LTCA
POSTITIVE
If FIRE POT is
positive, all
gains and all
losses are
dumped into the
HOTCH POT.
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