Knowledge Base

10282: 1040 - Section 1231 Loss

1040 Individual

In a 1040 return, the taxpayer has a Section 1231 loss that is used to offset ordinary income. On two of the attached worksheets (Wks CARRY and Wks 1231-C), however, the loss appears as not having been taken.

 Publication 544 explains:

  • "If you have a net section 1231 loss, it is ordinary loss.
  • If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. The rest, if any, is long-term capital gain.

Nonrecaptured section 1231 losses.  Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 asset is ordinary gain to the extent of your prior losses. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period."

Until the section 1231 loss is applied against a net section 1231 gain, it is a "non-recaptured section 1231 loss" that the software tracks for five years. Worksheets Wks CARRY and Wks 1231-C are part of that tracking process.

Wks CARRY lists a non-recaptured 1231 loss that will be updated to next year. Wks 1231-C provides a history of such losses and when they are recaptured (or “used”) by being applied against a net section 1231 gain.

Note: Wks CARRY must be enabled on the Setup > Options > Form & Schedule Options tab > Carryover worksheet.

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