Knowledge Base

12943: Section 1231 as Property Type on the 4562 Screen

Fed Returns Generally

Why can't I select section 1231 on the 4562 screen under Property type? 

Section 1231 refers to the tax treatment of certain types of property under IRC 26 Section 1231. Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions. Their treatment as ordinary or capital depends on whether there is a net gain or net loss from all section 1231 transactions.

Note: The sale of various types of 1231 property is treated differently. Therefore, there is no selection for section 1231 on the Property type drop list. Instead, select the type of 1231 property being sold, such as 1245 or 1250.

"Section 1231 transactions. The following transactions result in gain or loss subject to section 1231 treatment:

  • Sales or exchanges of real property or depreciable personal property
    • This property must be used in a trade or business and held longer than 1 year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business. This property also must be either real property or of a kind that is subject to depreciation under section 167 of the Internal Revenue Code.  See section 1231 for details.  Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions).
  • Sales or exchanges of leaseholds
    • The leasehold must be used in a trade or business and held longer than 1 year.
  • Sales or exchanges of cattle and horses
    • The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer.
  • Sales or exchanges of other livestock
    • This livestock does not include poultry. It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer.
  • Sales or exchanges of unharvested crops
    • The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included.
  • Cutting of timber or disposal of timber, coal, or iron ore 
    • The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore.
  • Condemnations
    • The condemned property must have been held longer than 1 year. It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. It cannot be property held for personal use.
  • Casualties and thefts
    • The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). You must have held the property longer than 1 year. However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. For more information on casualties and thefts, see Pub. 547."

Pub. 544, Sales and Other Dispositions of Assets, page 26.

Transactions to which section 1231 does not apply.

Section 1231 transactions do not include sales or exchanges of these noncapital assets:

  • Property for sale to customers (Pub. 544, p. 26)

"A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers."

  • Patents and copyrights (Pub. 544, p. 26)

"The sale of a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). The sale of such property results in ordinary income and generally is reported in Part II of Form 4797."

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