What Is Section 1231 Property?

Section 1231 property is real or depreciable personal property used in a trade or business and held for more than one year — including buildings, land, machinery, equipment, and farmland. The tax treatment of Section 1231 property upon sale is often called the "best of both worlds": gains from the sale are taxed at favorable long-term capital gains rates, while losses are deductible as ordinary losses against any type of income — unlike capital losses, which are limited to $3,000 per year against ordinary income. However, if you've claimed depreciation on the property, the portion of any gain attributable to that depreciation (known as depreciation recapture) is taxed as ordinary income — so the capital gains treatment applies only to appreciation above the original purchase price. If you had Section 1231 losses in any of the prior five years, those losses are recaptured as ordinary income when you have Section 1231 gains in the current year.