Capital Gains and Losses Long-term capital gain $3,000 Long-term capital loss




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Netting §1231 Gains and Lossess

Example
During 2006, Ross had $125,000 of AGI before considering the following recognized gains and losses:
Capital Gains and Losses
Long-term capital gain $3,000

Long-term capital loss (400)

Short-term capital gain 1,000

Short-term capital loss (200)
Casualties
Theft of diamond ring (owned four months) ($ 800)

Fire damage to personal residence (owned 10 yrs) (400)

Gain from insurance recovery on fire loss

To business building (owned 2 years) 200
§1231 Gains and Losses from Deprciable Business Assets Held Long Term
Asset A $ 300

Asset B 1,100

Asset C (500)

Gains and Losses from Sale of Depreciable Assets Held Short Term
Asset D $ 200

Asset E (300)
Ross had a net §1231 loss of $2,700 in 2004 and a net §1231 gain of $ 300 in 2005.
Solution
Diamond ring and the residence are personal use assets—not §1231 and are deductible from AGI as an itemized deduction. However, the $1,200 total loss does not exceed 10% of AGI ($12,500 before netting procedure). Only the business building (a §1231 asset) casualty gain remains. The netting of the §1231 asset and non-personal use capital asset casualty gains and losses contains only one item—the $200 gain from the business building. Therefore, treated as a §1231 gain to be netted with other §1231 gains and losses.
§1231 Netting
Asset A $ 300

Asset B 1,100

Asset C (500)

Casualty 200

Net $ 1,100 gain therefore treated as L.T.C.G. before the lookback rule. However, the 2004 §1231 loss of $2,700 was reduced by the $300 treated as ordinary income in 2005 to $2,400. Therefore, the $1,100 in 2006 will be treated as ordinary instead of capital and the remaining unrecaptured §1231 loss is $1,300 ($2,400-1,100) to be carried forward to 2007.

Capital Gains and Losses Netting
Long-term capital gain $ 3,000

Long-term capital loss (400)

Net L.T.C.G. $ 2,600
Short-term capital gain $1,000

Short-term capital loss (200)

Net Short-term gain $ 800
Results of the Gains and Losses on Ross’ Tax Computation
NLTCG $ 2,600

NSTCG 800

Ordinary gain from recapture

of §1231 losses 1,100

Ordinary gain from Asset D 200

Ordinary loss from Asset E (300)

AGI from other sources 125,000

AGI $ 129,400


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