Question

Since its formation, Roof Corporation has incurred the following net Section 1231 gains and losses. Year 1 Year 2 Year 3 $(12,000) 10,500 (14.600) Net Section 1231 loss Net Section 1231 gain Net Section 1231 loss a. In year 4, Roof sold only one asset and recognized a $7,500 net Section 1231 gain. How much of this gain is treated as capital gain, and how much is ordinary? b. In year 5, Roof sold one asset and recognized a $9,000 net Section 1231 gain. How much of this gain is treated as capital, and how much is ordinary? Complete this question by entering your answers in the tabs below. Required A Required B In year 4, Roof sold only one asset and recognized a $7,500 net Section 1231 gain. How much of this gain is treated as capital gain, and how much is ordinary? (Leave no cell blank. Enter "0" for cells that do not have an amount.) Capital gain Ordinary income

Answer 1

Section 1231 losses in the previous five years that is more than section 1231 gains during those same five years, the excess loss (the unapplied loss) is applied against the current year's section 1231 gain.

The amount of the loss that is applied against the current year's section 1231 gain is reported as ordinary income.

The balance of the current year's section 1231 gain that exceeds the recaptured section 1231 loss from the previous five years is reported as long-term capital gain.

To apply section 1231 losses of the previous 5 years to the current year's section 1231 gain, you begin with the earliest year.

a. 7,500 will be reported as ordinary Income as loss is applied from previous year to the extent 7,500

b Year 5 : $ 8,000 will be reported as ordinary gain since there exists unapplied losses in previous years (14,000-7,500+12,000-10,500). $1,000 will be reported as capital gain