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Updated for 2011

Capital Gains and Losses: Selling Business Property

Selling Business Property

If you sell:

Business inventory held for sale to customers or accounts or notes receivable acquired in the course of business:
- Gain is classified as ordinary gain.
- Loss is classified as ordinary loss.

Ordinary gains are taxed at the regular federal tax rates applied to ordinary income such as wages, self-employment income, and interest.

Ordinary losses, unlike capital losses, are not subject to the $3,000 annual deduction limitation.

Depreciable Business Property

If you sell:

Depreciable business property:
- A net gain may be treated as:
  - Long-term capital gain, or
  - Ordinary income
- A net loss is treated as an ordinary loss.

Long-term capital gain treatment:

The tax treatment of depreciable business property held over one year that is subsequently sold is governed by Section 1231 of the Internal Revenue Code; such property is referred to as Section 1231 property.

Under Section 1231, a net gain is treated as a long-term capital gain only on sales of depreciable business property held over one year PROVIDED:

Gains on the sale of such property exceed losses (if any) on the sales of such property.

Example:

You sell two pieces of equipment.
You realize a gain of $5,000 on one.
You realize of loss of $3,000 on the other.
You have a net gain of $2,000.

Treat the $2,000 net gain as a long-term capital gain. A long-term capital gain is taxed at the favorable capital gains rates.

Ordinary income treatment:

Gains on the sale of depreciable business property held one year or less are treated as ordinary income.

Ordinary income is subject to the regular federal income tax rates applied to wages, self-employment income, and interest.

Net loss tax treatment:

A net loss on the sale of depreciable business property is treated as an ordinary loss if:

A net loss results after netting gains and losses on the sales of section 1231 property (depreciable property held over one year).

An ordinary loss is not subject to the annual $3,000 deduction limit imposed on capital losses.

Netting means:

Add up all gains.
Add up all losses (if any).
Then, subtract all losses from all gains.
The end result is either a net gain or net loss.

Example:

You sell two pieces of equipment.
You realize a gain of $2,000 on one.
You realize of loss of $6,000 on the other.
You have a net loss of $4,000.

You can deduct the entire $4,000 as an ordinary loss.

The loss is not subject to the annual $3,000 deduction limit imposed on capital losses.

Reminder: Keep in mind, the favorable tax treatment under Section 1231, which allows you to get the benefit of the lower capital gains rate if you have a net gain, and deduct a net loss as an ordinary loss instead of a capital loss, applies to depreciable property held over one year.

Form 4797, Sale of Business Property

Report gains and losses on the sale of business property of Form 4797. For example, machinery and office equipment.

Capital Gains & Losses

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Need Some Deductions for 2011?

Capital Gains and Losses: Selling Business Property

Selling Business Property

Depreciable Business Property

Form 4797, Sale of Business Property

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