Property transaction planning
The Disposition Plan
Net first, then character: a 1231 net gain is capital and a net loss ordinary, 1245 recaptures depreciation, and 1031 and 121 defer or exclude.
How the exam words it
- -The stem gives a net capital loss and asks the individual deduction against ordinary income, testing the 3,000 limit and carryforward.
- -It sells depreciable property and asks the character, pointing to 1245 ordinary recapture and 1231 netting with the 5-year lookback.
- -It exchanges real property with boot and asks the recognized gain under section 1031.
- -It sells a principal residence and asks the taxable gain after the section 121 exclusion.
The playbook
- 1Net short-term and long-term separately, then deduct an individual net capital loss against ordinary income only up to 3,000 a year, carrying the rest forward.
- 2Recapture depreciation on personal property as ordinary under 1245 (lesser of gain or depreciation), then net 1231: a net gain is long-term capital, a net loss is ordinary.
- 3Apply the 5-year lookback to recharacterize net 1231 gain as ordinary up to prior nonrecaptured 1231 losses.
- 4Recognize the lesser of realized gain or boot in a real-property 1031 exchange, and exclude 250,000 (500,000 MFJ) of home-sale gain under section 121.
The trap
Treating a net 1231 loss as capital, or recognizing full realized gain in a 1031 exchange. A net 1231 loss is ordinary while a net gain is capital, and 1031 recognizes only the lesser of gain or boot.
How the exam varies it
The same pattern, re-skinned along these axes:
Capital-loss netting and the 3,000 individual limit1245 recapture and 1231 netting with the 5-year lookback1031 boot recognition versus the 121 home-sale exclusion
Drill this pattern
8 questions of The Disposition Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.