Understanding Section 1231 Gains and Losses for 2025
Overview
IRC §1231 allows certain real property and depreciable property used in a trade or business and held for more than one year to receive favorable mixed treatment. Net gains from qualifying §1231 property are treated as long term capital gains, while net losses are treated as ordinary losses. This combination is beneficial because it permits capital gain rates on disposition of long term business assets but allows full ordinary loss deductions when losses exceed gains. The 2025 One Big Beautiful Bill Act did not change §1231 directly, but increased expensing and potential recapture under §§1245 and 1250 may reduce the amount that ultimately receives §1231 capital gain treatment.
Key Tax Impacts
- Qualifying property includes real property and depreciable property used in a trade or business and held for more than one year (IRC §1231(b)(1)).
- All §1231 gains and losses for the year are netted. If gains exceed losses, the net amount is long term capital gain.
- If §1231 losses exceed gains, the net amount is ordinary loss, fully deductible against ordinary income.
- Casualty and theft gains and losses on business property can enter the §1231 computation when holding period and use tests are met.
- Recapture rules under §§1245 and 1250 apply first. Amounts recaptured as ordinary income do not receive §1231 treatment.
- Recent expensing rules enacted in 2025 may increase ordinary income on sale because more cost was deducted up front, which increases later recapture.
- Property held primarily for sale to customers in the ordinary course of business does not qualify, consistent with Malat v. Riddell, 383 U.S. 569 (1966).
Schedule a Consultation to determine whether a planned disposition will produce capital gain or ordinary income under the §1231 and recapture ordering rules.
Final Takeaway
IRC §1231 is favorable because it provides capital gain treatment when there is a net gain and ordinary loss treatment when there is a net loss. Actual results depend on proper classification of property, correct application of casualty and involuntary conversion rules, and recognition of ordinary income recapture before applying §1231. Careful year by year netting is required.
See current federal rates on the Economic Dashboard.
