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Internal Revenue Code, § 1231. Property Used In The Trade Or Business And Involuntary Conversions

I.R.C. § 1231(a) General Rule
I.R.C. § 1231(a)(1) Gains Exceed Losses
If—
I.R.C. § 1231(a)(1)(A)
the section 1231 gains for any taxable year, exceed
I.R.C. § 1231(a)(1)(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.
I.R.C. § 1231(a)(2) Gains Do Not Exceed Losses
If—
I.R.C. § 1231(a)(2)(A)
the section 1231 gains for any taxable year, do not exceed
I.R.C. § 1231(a)(2)(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.
I.R.C. § 1231(a)(3) Section 1231 Gains And Losses
For purposes of this subsection—
I.R.C. § 1231(a)(3)(A) Section 1231 Gain
The term “section 1231 gain” means—
I.R.C. § 1231(a)(3)(A)(i)
any recognized gain on the sale or exchange of property used in the trade or business, and
I.R.C. § 1231(a)(3)(A)(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.R.C. § 1231(a)(3)(A)(ii)(I)
property used in the trade or business, or
I.R.C. § 1231(a)(3)(A)(ii)(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.
I.R.C. § 1231(a)(3)(B) Section 1231 Loss
The term “section 1231 loss” means any recognized loss from a sale or exchange or conversion described in subparagraph (A).
I.R.C. § 1231(a)(4) Special Rules
For purposes of this subsection—
I.R.C. § 1231(a)(4)(A)
In determining under this subsection whether gains exceed losses—
I.R.C. § 1231(a)(4)(A)(i)
the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and
I.R.C. § 1231(a)(4)(A)(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.
I.R.C. § 1231(a)(4)(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.R.C. § 1231(a)(4)(B)(i)
property used in the trade or business, or
I.R.C. § 1231(a)(4)(B)(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.
I.R.C. § 1231(a)(4)(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.R.C. § 1231(a)(4)(C)(i)
property used in the trade or business, or
I.R.C. § 1231(a)(4)(C)(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.
I.R.C. § 1231(b) Definition Of Property Used In The Trade Or Business
For purposes of this section—
I.R.C. § 1231(b)(1) General Rule
The 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—
I.R.C. § 1231(b)(1)(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,
I.R.C. § 1231(b)(1)(B)
property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
I.R.C. § 1231(b)(1)(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
I.R.C. § 1231(b)(1)(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).
I.R.C. § 1231(b)(2) Timber, Coal, Or Domestic Iron Ore
Such term includes timber, coal, and iron ore with respect to which section 631 applies.
I.R.C. § 1231(b)(3) Livestock
Such term includes—
I.R.C. § 1231(b)(3)(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
I.R.C. § 1231(b)(3)(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.
I.R.C. § 1231(b)(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.”
I.R.C. § 1231(c) Recapture Of Net Ordinary Losses
I.R.C. § 1231(c)(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.
I.R.C. § 1231(c)(2) Non-Recaptured Net Section 1231 Losses
For purposes of this subsection, the term “non-recaptured net section 1231 losses” means the excess of—
I.R.C. § 1231(c)(2)(A)
the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over
I.R.C. § 1231(c)(2)(B)
the portion of such losses taken into account under paragraph (1) for such preceding taxable years.
I.R.C. § 1231(c)(3) Net Section 1231 Gain
For purposes of this subsection, the term “net section 1231 gain” means the excess of—
I.R.C. § 1231(c)(3)(A)
the section 1231 gains, over
I.R.C. § 1231(c)(3)(B)
the section 1231 losses.
I.R.C. § 1231(c)(4) Net Section 1231 Loss
For purposes of this subsection, the term “net section 1231 loss” means the excess of—
I.R.C. § 1231(c)(4)(A)
the section 1231 losses, over
I.R.C. § 1231(c)(4)(B)
the section 1231 gains.
I.R.C. § 1231(c)(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; Sept. 2, 1958, Pub. L. 85-866, title I, 49(a), 72 Stat. 1642; Feb. 26, 1964, Pub. L. 88-272, title II, 227(a)(2), 78 Stat. 97; Dec. 30, 1969, Pub. L. 91-172, title II, 212(b)(1), title V, 514(b)(2), 516(b), 83 Stat. 571, 643, 646; Oct. 4, 1976, Pub. L. 94-455, title XIV, 1402(b)(1)(R), (2), 90 Stat. 1732; Nov. 6, 1978, Pub. L. 95-600, title VII, 701(ee)(1), 92 Stat. 2924; Aug. 13, 1981, Pub. L. 97-34, title V, 505(c)(1), 95 Stat. 332; July 18, 1984, Pub. L. 98-369, div. A, title I, 176(a), title VII, 711(c)(2)(A)(iii), title X, 1001(b)(15), 98 Stat. 709, 944, 1012; Pub. L. 106-170, title V, Sec. 532(c), Dec. 17, 1999, 113 Stat 1860; Pub. L. 113-295, Div. A, title II, Sec. 221(a)(81), Dec. 19, 2014, 128 Stat. 4010; Pub. L. 115-97, title I, Sec. 13314(b), Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
Amendments to Part
1988--Pub. L. 100-647, title I, 1018(u)(24), Nov. 10, 1988, 102 Stat. 3591, substituted “geothermal, or other mineral properties” for “or geothermal property” in item 1254.
1986--Pub. L. 99-514, title IV, 403(b), Oct. 22, 1986, 100 Stat. 2222, added item 1257.
1984--Pub. L. 98-369, div. A, title I, 42(b)(2), 102(e)(6), title IV, 492(c), July 18, 1984, 98 Stat. 557, 624, 854, struck out items 1232 “Bonds and other evidence of indebtedness”, 1232A “Original issue discount”, 1232B “Tax treatment of stripped bonds”, 1251 “Gain from disposition of property used in farming where farm losses offset nonfarm income”, and substituted “Section 1256 contracts” for “Regulated futures contracts” in item 1256.
1982--Pub. L. 97-248, title II, 231(d), 232(c), Sept. 3, 1982, 96 Stat. 499, 501, added items 1232A and 1232B.
1981--Pub. L. 97-34, title V, 503(b), 507(b), Aug. 13, 1981, 95 Stat. 330, 333, added items 1234A and 1256.
1978--Pub. L. 95-618, title IV, 402(c)(4), Nov. 9, 1978, 92 Stat. 3202, substituted “oil, gas, or geothermal" for “oil or gas” in item 1254.
Pub. L. 95-600, title V, 543(c)(2), Nov. 6, 1978, 92 Stat. 2890, added item 1255.
1976--Pub. L. 94-455, title II, 205(d), title XIX, 1901(b)(34), Oct. 4, 1976, 90 Stat. 1535, 1802, added item 1254 and struck out item 1240 “Taxability to employee of termination payments”.
1969--Pub. L. 91-172, title II, 211(b)(7), 214(b), title V, 516(c)(2)(C), Dec. 30, 1969, 83 Stat. 570, 573, 648, added items 1251 to 1253.
1964--Pub. L. 88-272, title II, 231(b)(7), Feb. 26, 1964, 78 Stat. 105, added item 1250.
1962--Pub. L. 87-834, 13(a)(2), 14(a)(2), 15(b), 16(b), Oct. 16, 1962, 76 Stat. 1033, 1040, 1044, 1045, added items 1245-1249.
1958--Pub. L. 85-866, title I, 57(c)(3), title II, 202(c), Sept. 2, 1958, 72 Stat. 1646, 1678, added items 1242-1244.
AMENDMENTS
2017--Subsec. (b)(1)(C). Pub. L. 115-97, Sec. 13314(b), amended subpar. (C) by inserting ‘‘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, Div. A, Sec. 221(a)(81), amended subpar. (A) by striking “beginning after December 31, 1981”.
1999--Subsec. (b)(1)(C), (D). Pub. L. 106-170, Sec. 532(c)(1)(G), substituted “section 1221(a)” for “section 1221”.
1984--Subsec. (a). Pub. L. 98-369, 1001(b)(15), substituted “6 months” for “1 year” wherever appearing.
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), substituted “6 months” for “1 year”.
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.
EFFECTIVE DATE OF 2017 AMENDMENT
Amendment by Pub. L. 115-97, Sec. 13314(b), effective for dispositions after December 31, 2017.
EFFECTIVE DATE OF 2014 AMENDMENT
Amendment by Pub. L. 113-295, Div. A, Sec. 221(a)(81), effective on the date of the enactment date of this Act [Enacted: Dec. 19, 2014].
Section 221(b)(2) of Pub. L. 113-295, Div. A, provided the following Savings Provision:
“(2) SAVINGS PROVISION.—If—
“(A) any provision amended or repealed by the amendments made by this section applied to—
“(i) any transaction occurring before the date of the enactment of this Act [Enacted: Dec. 19, 2014],
“(ii) any property acquired before such date of enactment, or
“(iii) any item of income, loss, deduction, or credit taken into account before such date of enactment, and
“(B) the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by this section) affect the liability for tax for periods ending after date of enactment, nothing in the amendments or repeals made by this section shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”
EFFECTIVE DATE OF 1999 AMENDMENT
Amendment by Sec. 532(c)(1)(G) of Pub. L. 106-170 shall apply to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after enactment date of this Act [Enacted: Dec. 17, 1999].
EFFECTIVE DATE OF 1984 AMENDMENT
Section 176(b) of Pub. L. 98-369 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
Section 701(ee)(2) of Pub. L. 95-600 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
Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment made by section 1402(b)(1)(R) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977.
Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment made by section 1402(b)(2) of Pub. L. 94-455 is effective with respect to taxable years beginning after Dec. 31, 1977.
EFFECTIVE DATE OF 1969 AMENDMENT
Section 212(b)(2) of Pub. L. 91-172 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
Section 49(b) of Pub. L. 85-866 provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1957.”
GAIN OR LOSS FROM SALE OR EXCHANGE OF CERTAIN PREFERRED STOCK
Pub. L. 110-343, Div. A, Sec, 301 provided that:
“a) IN GENERAL.—For purposes of the Internal Revenue Code of 1986, gain or loss from the sale or exchange of any applicable preferred stock by any applicable financial institution shall be treated as ordinary income or loss.
“(b) APPLICABLE PREFERRED STOCK.—For purposes of this section, the term ‘’applicable preferred stock” means any stock—
“(1) which is preferred stock in—
“(A) the Federal National Mortgage Association, established pursuant to the Federal National Mortgage Association Charter Act (12 U.S.C. 1716 et seq.), or
“(B) the Federal Home Loan Mortgage Corporation, established pursuant to the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1451 et seq.), and
“(2) which—
“(A) was held by the applicable financial institution on September 6, 2008, or
“(B) was sold or exchanged by the applicable financial institution on or after January 1, 2008, and before September 7, 2008.
“(c) APPLICABLE FINANCIAL INSTITUTION.—For purposes of this section:
“(1) IN GENERAL.—Except as provided in paragraph (2), the term ‘’applicable financial institution” means—
“(A) a financial institution referred to in section 582(c)(2) of the Internal Revenue Code of 1986, or
“(B) a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))).
“(2) SPECIAL RULES FOR CERTAIN SALES.—In the case of—
“ (A) a sale or exchange described in subsection (b)(2)(B), an entity shall be treated as an applicable financial institution only if it was an entity described in subparagraph (A) or (B) of paragraph (1) at the time of the sale or exchange, and
“ (B) a sale or exchange after September 6, 2008, of preferred stock described in subsection (b)(2)(A), an entity shall be treated as an applicable financial institution only if it was an entity described in subparagraph (A) or (B) of paragraph (1) at all times during the period beginning on September 6, 2008, and ending on the date of the sale or exchange of the preferred stock.
“(d) SPECIAL RULE FOR CERTAIN PROPERTY NOT HELD ON SEPTEMBER 6, 2008.—The Secretary of the Treasury or the Secretary's delegate may extend the application of this section to all or a portion of the gain or loss from a sale or exchange in any case where—
“(1) an applicable financial institution sells or exchanges applicable preferred stock after September 6, 2008, which the applicable financial institution did not hold on such date, but the basis of which in the hands of the applicable financial institution at the time of the sale or exchange is the same as the basis in the hands of the person which held such stock on such date, or
“(2) the applicable financial institution is a partner in a partnership which? (A) held such stock on September 6, 2008, and later sold or exchanged such stock, or
“(B) sold or exchanged such stock during the period described in subsection (b)(2)(B).
“(e) REGULATORY AUTHORITY.—The Secretary of the Treasury or the Secretary's delegate may prescribe such guidance, rules, or regulations as are necessary to carry out the purposes of this section.
“(f) EFFECTIVE DATE.—This section shall apply to sales or exchanges occurring after December 31, 2007, in taxable years ending after such date.”
[1232 to 1232B. Repealed. Pub. L. 98-369, div. A, title I, 42(a)(1), July 18, 1984, 98 Stat. 556]
Section 1232, acts Aug. 16, 1954, ch. 736, 68A Stat. 326; Sept. 2, 1958, Pub. L. 85-866, title I, 50(a), 51, 72 Stat. 1642, 1643; June 25, 1959, Pub. L. 86-69, 3(e), 73 Stat. 140; Sept. 2, 1964, Pub. L. 88-563, 5, 78 Stat. 845; Dec. 30, 1969, Pub. L. 91-172, title IV, 413(a), (b), 83 Stat. 609, 611; Oct. 4, 1976, Pub. L. 94-455, title XIV, 1402(b)(1)(S), (2), title XIX, 1901(b)(3)(I), (14)(D), 1904(b)(10)(C), 90 Stat. 1732, 1793, 1796, 1817; Aug. 13, 1981, Pub. L. 97-34, title V, 505(b), 95 Stat. 331; Sept. 3, 1982, Pub. L. 97-248, title II, 231(c), 232(b), title III, 310(b)(6), 96 Stat. 499, 501, 599; Jan. 12, 1983, Pub. L. 97-448, title III, 306(a)(9)(B), (C)(i), (ii), 96 Stat. 2403, 2404; July 18, 1984, Pub. L. 98-369, div. A, title X, 1001(b)(16), (d), 98 Stat. 1012, related to bonds and other evidences of indebtedness. See section 1271 et seq. of this title.
Section 1232A, added Pub. L. 97-248, title II, 231(a), Sept. 3, 1982, 96 Stat. 496, and amended Pub. L. 98-369, div. A, title II, 211(b)(17), July 18, 1984, 98 Stat. 756, related to original issue discount. See section 1271 et seq. of this title.
Section 1232B, added Pub. L. 97-248, title II, 232(a), Sept. 3, 1982, 96 Stat. 499, related to stripped bonds. See section 1286 of this title.
Effective Date of Repeal
Repeal applicable to taxable years ending after July 18, 1984, see section 44 of Pub. L. 98-369, set out as an Effective Date note under section 1271 of this title.