The formulas
- Pool = non-recaptured net section 1231 losses of the 5 most recent preceding years
- Ordinary income = min(net section 1231 gain, pool)
- Long-term capital gain = net section 1231 gain - ordinary income
How it works
When gains from business property held more than a year exceed the losses, net section 1231 gain is treated as long-term capital gain. When losses exceed gains, the net loss is ordinary. Section 1231(c) stops a taxpayer from taking ordinary losses in one year and capital gains in the next: net gain is ordinary income up to the non-recaptured net section 1231 losses of the five most recent preceding years.
Losses already recaptured in a prior year are excluded, so enter only the amounts not yet recaptured. This tool starts from a net gain you have already computed. Depreciation recapture under other sections is not modeled.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Why does the lookback matter?
It makes sure a recent ordinary loss is paid back with ordinary income before later gains get capital gain rates.
What counts as non-recaptured?
A net section 1231 loss from the five prior years that has not already been used to convert a later gain to ordinary income.
Does it apply to a net loss year?
No. A net loss is ordinary and adds to the pool for later years.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.