Property transactions
The Gain Character Call
Compute the gain, then character it: capital, ordinary, or section 1231, with recapture peeling off the ordinary slice first.
How the exam words it
- -The stem sells an asset and asks for the amount AND the character of the gain or loss.
- -Depreciable business property is sold, raising section 1231 and section 1245 or 1250 recapture.
- -A loss is disallowed by the wash-sale or related-party rules.
- -Property was received by gift or inheritance and it asks for the basis used to compute gain.
The playbook
- 1Compute gain as amount realized minus adjusted basis, setting basis by how the asset was acquired: cost, carryover for a gift, or fair value at death for an inheritance.
- 2Character by asset type: capital assets give capital gain or loss, while section 1231 business assets net to long-term capital gain if the net is a gain but ordinary if the net is a loss.
- 3Peel off recapture first: section 1245 recaptures all prior depreciation as ordinary income and section 1250 recaptures only excess depreciation, before any section 1231 treatment.
- 4Apply the loss traps: a wash sale defers the loss into the replacement stock's basis, and a related-party sale disallows the loss until the buyer resells to an outsider.
The trap
Using the wrong basis for gifted property. A gift takes a carryover basis for computing a gain, but a dual-basis rule (the lower of carryover basis or fair value at the gift date) applies when the asset is later sold at a loss.
How the exam varies it
The same pattern, re-skinned along these axes:
Capital versus ordinary versus section 1231Section 1245 versus section 1250 recaptureGift carryover basis versus inherited stepped-up basis, and the loss-disallowance rules
Drill this pattern
8 questions of The Gain Character Call from across the AUD topics. Clear it by getting 5 right with a streak of 3.