Since its formation, Roof Corporation has incurred the following net Section 1231 gains and losses. Year 1 $ (12,000 ) Net Section 1231 loss Year 2 10,500 Net Section 1231 gain Year 3 (14,000 ) Net Section 1231 loss 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?

Having a net section loss of 1231, it can be counted as an ordinary loss. Whenever you have a net section gain of 1231, it is ordinary income up to the sum of your section 1231 losses that was not recaptured from previous years. The rest, that is if there’s any, is long-term capital gain.

Year 2: Ordinary income = 10,500

Year 3: Loss carried forward = 12,000-10,500+14000 = $15,500

Year 4: Ordinary Income = $7,500 (15,500-7500 = $8,000)

Year 5: Ordinary Income = $8,000 & Capital Gain = $1,000