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)
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.