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26 U.S. Code § 1231 - Property used in the trade or business and involuntary conversions

U.S. Code
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(a) General rule

(1) Gains exceed lossesIf—

(A)

the section 1231 gains for any taxable year, exceed

(B)

the section 1231 losses for such taxable year,

such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be.

(2) Gains do not exceed lossesIf—

(A)

the section 1231 gains for any taxable year, do not exceed

(B)

the section 1231 losses for such taxable year,

such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets.

(3) Section 1231 gains and lossesFor purposes of this subsection—

(A) Section 1231 gainThe term “section 1231 gain” means—

(i)

any recognized gain on the sale or exchange of property used in the trade or business, and

(ii) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of—

(I)

property used in the trade or business, or

(II)

any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit.

(B) Section 1231 loss

The term “section 1231 loss” means any recognized loss from a sale or exchange or conversion described in subparagraph (A).

(4) Special rulesFor purposes of this subsection—

(A) In determining under this subsection whether gains exceed losses—

(i)

the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and

(ii)

the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply.

(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of—

(i)

property used in the trade or business, or

(ii)

capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit,

shall be treated as losses from a compulsory or involuntary conversion.

(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any—

(i)

property used in the trade or business, or

(ii)

any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit,

this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.

(b) Definition of property used in the trade or businessFor purposes of this section—

(1) General ruleThe term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not—

(A)

property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,

(B)

property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,

(C)

a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of section 1221(a), or

(D)

a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in paragraph (5) of section 1221(a).

(2) Timber, coal, or domestic iron ore

Such term includes timber, coal, and iron ore with respect to which section 631 applies.

(3) LivestockSuch term includes—

(A)

cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and

(B)

other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition.

Such term does not include poultry.

(4) Unharvested crop

In the case of an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as “property used in the trade or business.”

(1) In general

The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses.

(2) Non-recaptured net section 1231 lossesFor purposes of this subsection, the term “non-recaptured net section 1231 losses” means the excess of—

(A)

the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over

(B)

the portion of such losses taken into account under paragraph (1) for such preceding taxable years.

(3) Net section 1231 gainFor purposes of this subsection, the term “net section 1231 gain” means the excess of—

(A)

the section 1231 gains, over

(B)

the section 1231 losses.

(4) Net section 1231 lossFor purposes of this subsection, the term “net section 1231 loss” means the excess of—

(A)

the section 1231 losses, over

(B)

the section 1231 gains.

(5) Special rules

For purposes of determining the amount of the net section 1231 gain or loss for any taxable year, the rules of paragraph (4) of subsection (a) shall apply.

(Aug. 16, 1954, ch. 736, 68A Stat. 325; Pub. L. 85–866, title I, § 49(a), Sept. 2, 1958, 72 Stat. 1642; Pub. L. 88–272, title II, § 227(a)(2), Feb. 26, 1964, 78 Stat. 97; Pub. L. 91–172, title II, § 212(b)(1), title V, §§ 514(b)(2), 516(b), Dec. 30, 1969, 83 Stat. 571, 643, 646; Pub. L. 94–455, title XIV, § 1402(b)(1)(R), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 95–600, title VII, § 701(ee)(1), Nov. 6, 1978, 92 Stat. 2924; Pub. L. 97–34, title V, § 505(c)(1), Aug. 13, 1981, 95 Stat. 332; Pub. L. 98–369, div. A, title I, § 176(a), title VII, § 711(c)(2)(A)(iii), title X, § 1001(b)(15), (e), July 18, 1984, 98 Stat. 709, 944, 1012; Pub. L. 106–170, title V, § 532(c)(1)(G), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 113–295, div. A, title II, § 221(a)(81), Dec. 19, 2014, 128 Stat. 4049; Pub. L. 115–97, title I, § 13314(b), Dec. 22, 2017, 131 Stat. 2133.)

Editorial Notes

Amendments

2017—Subsec. (b)(1)(C). Pub. L. 115–97 inserted “a patent, invention, model or design (whether or not patented), a secret formula or process,” before “a copyright”.

2014—Subsec. (c)(2)(A). Pub. L. 113–295 struck out “beginning after December 31, 1981” after “years”.

1999—Subsec. (b)(1)(C), (D). Pub. L. 106–170 substituted “section 1221(a)” for “section 1221”.

1984—Subsec. (a). Pub. L. 98–369, § 1001(b)(15), (e), substituted “6 months” for “1 year” wherever appearing, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Pub. L. 98–369, § 711(c)(2)(A)(iii), amended subsec. (a) generally, substituting pars. (1) to (4), for “If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 1 year into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 1 year. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For purposes of this subsection—

“(1) in determining under this subsection whether gains exceed losses, the gains described therein shall be included only if and to the extent taken into account in computing gross income and the losses described therein shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply; and

“(2) losses (including losses not compensated for by insurance or otherwise) upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of (A) property used in the trade or business or (B) capital assets held for more than 1 year shall be considered losses from a compulsory or involuntary conversion.

In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any property used in the trade or business or of any capital asset held for more than 1 year, this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.”

Subsec. (b)(1), (4). Pub. L. 98–369, § 1001(b)(15), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.

Subsec. (c). Pub. L. 98–369, § 176(a), added subsec. (c).

1981—Subsec. (b)(1)(D). Pub. L. 97–34 substituted “paragraph (5)” for “paragraph (6)”.

1978—Subsec. (b)(1)(D). Pub. L. 95–600 added subpar. (D).

1976—Subsecs. (a), (b)(1), (4). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year” wherever appearing.

Pub. L. 94–455, § 1402(b)(1)(R), provided that in subsecs. (a), first and last sentences, (a)(2), and (b)(1), (4), “6 months” would be changed to “9 months” for taxable years beginning in 1977.

1969—Subsec. (a). Pub. L. 91–172, § 516(b), provided that casualty (or theft) losses with respect to depreciable property and real estate used in trade or business and capital assets held for the production of income as well as personal assets are to be consolidated with casualty (or theft) gains with respect to this type of property and if the casualty losses exceed the casualty gains, the net loss is treated as an ordinary loss without regard to whether there may be noncasualty gains under this section, but, if the casualty gains exceed the casualty losses, the net gain is treated as a gain under this section and must be consolidated with other gains and losses under this section.

Subsec. (b)(1)(C). Pub. L. 91–172, § 514(b)(2), inserted reference to a letter or memorandum.

Subsec. (b)(3). Pub. L. 91–172, § 212(b)(1), redesignated existing provisions as subpar. (B) and added subpar. (A).

1964—Subsec. (b)(2). Pub. L. 88–272 inserted reference to iron ore in text, and to domestic iron ore in heading.

1958—Subsec. (a). Pub. L. 85–866 inserted provision respecting casualty losses sustained upon certain uninsured property.

Statutory Notes and Related Subsidiaries

Effective Date of 2017 Amendment

Amendment by Pub. L. 115–97 applicable to dispositions after Dec. 31, 2017, see section 13314(c) of Pub. L. 115–97, set out as a note under section 1221 of this title.

Effective Date of 2014 Amendment

Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.

Effective Date of 1984 Amendment

Pub. L. 98–369, div. A, title I, § 176(b), July 18, 1984, 98 Stat. 709, provided that:

“The amendment made by subsection (a) [amending this section] shall apply to net section 1231 gains for taxable years beginning after December 31, 1984.”

Amendment by section 711(c)(2)(A)(iii) of Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1983, see section 711(c)(2)(A)(v) of Pub. L. 98–369, set out as a note under section 165 of this title.

Amendment by section 1001(b)(15) of Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date of 1981 Amendment

Amendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of Pub. L. 97–34, set out as an Effective Date note under section 1092 of this title.

Effective Date of 1978 Amendment

Pub. L. 95–600, title VII, § 701(ee)(2), Nov. 6, 1978, 92 Stat. 2924, provided that:

“The amendment made by paragraph (1) [amending this section] shall apply with respect to sales, exchanges, and contributions made after October 4, 1976.”

Effective Date of 1976 Amendment

Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.

Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Effective Date of 1969 Amendment

Pub. L. 91–172, title II, § 212(b)(2), Dec. 30, 1969, 83 Stat. 571, provided that:

“The amendments made by paragraph (1) [amending this section] shall apply to livestock acquired after December 31, 1969.”

Amendment by section 514(b)(2) of Pub. L. 91–172 applicable to sales and other dispositions occurring after July 25, 1969, see section 514(c) of Pub. L. 91–172, set out as a note under section 1221 of this title.

Amendment by section 516(b) of Pub. L. 91–172 applicable to taxable years beginning after Dec. 31, 1969, see section 516(d)(2) of Pub. L. 91–172, set out as a note under section 1001 of this title.

Effective Date of 1964 Amendment

Amendment by Pub. L. 88–272 applicable with respect to amounts received or accrued in taxable years beginning after Dec. 31, 1963, attributable to iron ore mined in such years, see section 227(c) of Pub. L. 88–272, set out as a note under section 272 of this title.

Effective Date of 1958 Amendment

Pub. L. 85–866, title I, § 49(b), Sept. 2, 1958, 72 Stat. 1642, provided that:

“The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1957.”