Section 1231 loss taken as an ordinary loss

[lauriem33]

I think I may have made a mistake in a prior year when disposing assets.   Capital assets depreciated, business use, held for over 1 year.  There were no gains in that year or the current year.   When client sold these assets at a loss I  entered the disposition on the asset entry worksheets.  They carried forward to form 4797 part I.  In the current year they are showing as nonrecaptured net section 1231 losses and are not reducing income.   I am pretty sure they can be used as ordinary losses vs. capital losses.  I think I should have entered the disposition on the 4797 and elected part II.  I don't mind amending the prior year but I just want to make sure I'm right in my thinking.  I did forgo the NOL Carryback.   Thanks

[sjrcpa · Accepted solution]

Prior year disposition was correct. Net 1231 losses do reduce ordinary income. For the next 5 years the benefit of the ordinary loss will be recaptured if there are net 1231 gains. That's what the unrecaptured 1231 loss represents.

[Terry53029]

Here is an example to help you understand 1231 loss from IRS:

Here is the link: https://www.irs.gov/instructions/i4797

Example.

You had net section 1231 losses of $4,000 and $6,000 in 2014 and 2015, respectively, and net section 1231 gains of $3,000 and $2,000 in 2018 and 2019, respectively. The 2019 net section 1231 gain of $2,000 is entered on line 7 and the nonrecaptured net section 1231 losses of $7,000 ($10,000 net section 1231 losses minus the $3,000 that was applied against the 2019 net section 1231 gain) are entered on line 8. The entire $2,000 net section 1231 gain on line 7 is treated as ordinary income and is entered on line 12 of Form 4797. For recordkeeping purposes, the $4,000 loss from 2014 is all recaptured ($3,000 in 2018 and $1,000 in 2019), and you have $5,000 of section 1231 losses from 2015 left to recapture ($6,000 minus the $1,000 recaptured this year).

[lauriem33]

Thank you so much

[lauriem33]

That's great to know.  Thank you!

[sjrcpa]

You're welcome