Five Year Recapture

[Corduroy Frog]

Before favorable LTCG treatment can be applied to a Section 1231 transaction, prior net losses for the last 5 years must be recaptured in the calculation.

In 2009, hypothetical Mr. Smith sells a Truck for $5000, previously used in business. He originally paid $3500, and it is fully depreciated. Total gain $5000, split into $1500 in capital gains and $3500 in depreciation recapture.

In 2010, he reported a $10,000 loss on Form 4797.

For 2011, what is his potential loss to apply for purposes of the 5-year recapture?
a. $5000 since he reported a gain of $5000 in 2009.
b. $6500 since $1500 was taken as a capital gain in 2009.

[Davc]

$10,000......

[Nashville]

A new Clock?

Davc --

Are you saying $10,000 because gains cannot be netted against losses, or because a "new clock" begins after gain was reported in 2009?

[Gary2]

In 2009: $3500 of 1245 recapture taxed as ordinary income, $1500 of 1231 gain, taxed as capital gain.

In 2010: $10,000 of 1231 loss, taxed as ordinary loss.

In 2011: "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 by treating the gain as ordinary income." Since your 2009 1231 gain was treated as a capital gain, it doesn't apply. The taxpayer has a total of $10,000 of 1231 losses that have never been recaptured, and hence are applicable to recapture in 2011.

It's not a matter of restarting the clock. It's that 1231 losses are only recaptured against future gains, not previous gains. Reporting a 1231 capital gain doesn't cause the clock to be restarted, but it implies that any earlier losses have been exhausted.

[Davc]

What he said.

[Corduroy Frog]

Thanks

Thanks guys. Good discussion, and helpful.