GroundSkill
Compute gain or loss including recapture with capital netting
Basis is the starting number; this lesson uses it to work out the result of a sale. A sale produces an amount realized, the difference from adjusted basis decides gain or loss, depreciation can pull part of the gain back into ordinary income, the holding period sorts what is left into short term or long term, and the netting rules decide how much of a loss the year absorbs. The order matters: compute, classify, then net.
The sale computation has three steps. First, build the amount realized: cash plus the value of property received plus debts the buyer assumes, minus selling expenses. Second, subtract adjusted basis; a positive difference is gain and a negative one is loss. Third, sort the character: a loss on personal-use property stops here with no deduction (except a casualty or theft loss, covered with casualties and thefts), while a gain on depreciable business property may have part recharacterized as ordinary recapture income (the depreciation portion for section 1245 property, only additional depreciation for section 1250 property), leaving the remainder as section 1231 gain for property used in the business and held longer than 1 year.
A landlord sells a rental building used in her business and held six years for $200,000 cash; the buyer assumes a $50,000 mortgage and the seller pays $6,000 in commissions. The amount realized is $200,000 + $50,000 − $6,000 = $244,000. Her cost was $180,000 and she took $40,000 of straight-line depreciation, so adjusted basis is $140,000 and the gain is $104,000. Because straight-line depreciation leaves no additional depreciation, none of the gain is ordinary recapture income; the full $104,000 is section 1231 gain, including a $40,000 unrecaptured section 1250 gain piece taxed at a maximum 25% rate.
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A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. A loss occurs when the adjusted basis of the property is more than the amount you realize on the sale or exchange.View on the source
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Amount realized. The amount you realize from a sale or exchange is the total of all the money you receive plus the fair market value (defined below) of all property or services you receive.View on the source
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The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.View on the source
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Total . . . . . . . . . . . . . . . . . . . . . . 140,000 Minus: Selling expenses . . . . . . . . . (4,000)View on the source
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a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft loss.View on the source
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When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules.View on the source
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A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property.View on the source
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Sales or exchanges of real property or depreciable personal property. This property must be used in a trade or business and held longer than 1 year.View on the source
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Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.View on the source
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If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight-line method.View on the source
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Unrecaptured section 1250 gain. Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation.View on the source
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THEN your maximum capital gain rate is... collectibles gain 28% eligible gain on qualified small business stock minus the section 1202 exclusion 28% unrecaptured section 1250 gain 25%View on the source
A taxpayer sells a rental building. The buyer pays $70,000 cash plus property with a fair market value of $5,000 and assumes a $10,000 mortgage. Selling expenses are $2,000. The building cost $50,000, improvements cost $10,000, and depreciation taken was $5,000. What is the gain or loss?
The holding period is the time between acquisition and disposition, and for a capital asset one year divides it: 1 year or less is short term, longer than 1 year is long term. Counting starts the day after acquisition, and the disposition day counts as held. Gifts can inherit the giver's clock when basis carries over, while a gift whose basis is FMV restarts the clock the day after the gift; real estate has its own title-and-possession start rules, and inherited property is treated as long term from receipt.
| Held | Result |
|---|---|
| 1 year or less | Short-term capital gain or loss |
| Longer than 1 year | Long-term capital gain or loss |
An investor buys stock on March 3, 2024 and sells on March 10, 2025. Counting starts March 4, 2024, so she held it longer than 1 year and the gain is long term. Had she sold on February 20, 2025, within one year, the same gain would be short term.
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Generally, if you hold a capital asset 1 year or less, the gain or loss from its disposition is short term.View on the source
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If you hold a capital asset longer than 1 year, the gain or loss from its disposition is generally long term.View on the source
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To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property.View on the source
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Inherited property. If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.View on the source
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Gift. If you receive a gift of property and your basis in it is figured using the donor’s basis, your holding period includes the donor’s holding period.View on the source
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Real property. To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership.View on the source
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If your basis is giver’s adjusted basis, same day as giver’s holding period began. If your basis is FMV, day after date of gift.View on the source
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Patent property. If you dispose of patent property, you are considered to have held the property longer than 1 year, no matter how long you actually held it.View on the source
Which of the following sales of a capital asset is long-term?
Business-asset sales net under section 1231 before this step's netting: combine all section 1231 gains and losses for the year, treat a net loss as ordinary, and treat a net gain as ordinary up to nonrecaptured section 1231 losses from the previous 5 years, carrying the rest to the long-term group as long-term capital gain from Part I of Form 4797. Netting then runs in steps. Total the short-term group on its own and the long-term group on its own, then combine the two net results. A combined net gain is taxable, with maximum rates of 0%, 15%, 20%, 25%, and 28% — the 25% rate capping unrecaptured section 1250 gain and the 28% rate covering collectibles gains. Recapture itself sits outside this netting: section 1245 gain is ordinary up to depreciation allowed or allowable, while section 1250 gain is ordinary only up to additional depreciation. Capital losses offset capital gains in full; only a spillover net loss beyond those gains meets the yearly deduction cap of $3,000 ($1,500 if married filing separately), with the excess carried forward.
A filer has a $5,000 short-term gain and a $9,000 short-term loss, netting to a $4,000 short-term loss, plus a $10,000 long-term gain and a $2,000 long-term loss, netting to an $8,000 long-term gain. Combined, $8,000 − $4,000 = $4,000 of net capital gain, taxable for the year. Had the longs instead netted to zero, the $4,000 short-term loss would allow a $3,000 deduction this year and a $1,000 carryover.
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The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.View on the source
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The yearly limit on the amount of the capital loss an individual can deduct is $3,000 ($1,500 if you are married and file a separate return).View on the source
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Capital loss carryover. Generally, you have a capital loss carryover if either of the following situations applies to you. • Your net loss is more than the yearly limit.View on the source
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To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. • If you have a net section 1231 loss, it is ordinary loss.View on the source
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• If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. The rest, if any, is long-term capital gain.View on the source
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Nonrecaptured section 1231 losses. Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain.View on the source
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• Net section 1231 gain from Part I of Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years.View on the source
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For 2025, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%.View on the source
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Unrecaptured section 1250 gain. Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation.View on the source
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28% rate gain. This gain includes gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock minus the section 1202 exclusion.View on the source
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THEN your maximum capital gain rate is... collectibles gain 28% eligible gain on qualified small business stock minus the section 1202 exclusion 28% unrecaptured section 1250 gain 25%View on the source
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A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property.View on the source
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Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.View on the source
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Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income.View on the source
In 2025 a taxpayer has a $5,000 net section 1231 gain. The only section 1231 amount in the prior 5 years is a $2,000 net section 1231 loss from 2022 that has never been applied. How is the 2025 gain treated?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
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