Section 1231 Property


DEFINITION of 'Section 1231 Property'

1231 property is real or depreciable business property held for over a year. Section 1231 property includes buildings, machinery, land, timber and other natural resources, unharvested crops, cattle, livestock and leaseholds that are at least a year old, but does not include poultry, trademarks, or inventory.


BREAKING DOWN 'Section 1231 Property'

Broadly speaking, if gains on property fitting Section 1231's definition are more than the adjusted basis and amount of depreciation, the income is counted as capital gains, and as result it is taxed at a lower rate than ordinary income. When losses are recorded on section 1231 property, however, that loss is classified as an ordinary loss and is 100% deductible against their income. Ordinarily, if income was qualified as capital gains, so would any losses which can only be deductible up to $3,000 for the tax year, and any losses in excess of that figure would be arrived at in the following year. This law makes it so taxpayers and business owners get the best of both worlds.

1231 Transactions

1231 transactions including the following are subject to treatment provided the following:

  • Casualties and thefts – If you have held a property for more than one year and it is adversely effected by theft casualty.
  • Condemnations – If a property was held for more than a year, and held as a capital asset in connection with trade or business.
  • Sale or exchange of real property, personal property that is depreciable – If the property was held for more than a year and was used in trade or in a business (usually generating revenue via rent or royalties). 
  • Leaseholds either sold or exchanged – As long as it was held for a year and used in trade or business.
  • Cattle and horses sold or exchanged – If held for two years and used for dairy, draft, breeding, or sporting purposes.
  • Unharvested crops sold or exchanged – If held for one year and then sold, exchanged, or converted involuntarily and then not reacquired through any means. 
  • Disposal or Cutting of timber, coal, or iron ore – If treated as sale. 

What is 1231 Property?

‘Section 1231 property’ is an umbrella term for section 1245 property and section 1250 property, both of which are subdivisions of section 1231. Section 1231 defines the tax treatment that the gains and losses of property fitting the definitions of sections 1245 and 1250.

Section 1245 Property

Section 1245 property cannot include buildings or structural components unless the structure is designed specifically to handle the stresses and demands of a specific use, and can’t be used for any other use, in which case it can be considered closely related to the property it houses. Section 1245 property is any asset that is depreciable or subject to amortization and meets any of the following descriptions:

  • Personal property - Generally defined as property other than real estate
  • Other tangible property - This would include machinery or facility that play a key role in production, extraction, or furnishing of services, as well as certain research facilities, or a facility for the bulk storage of fungible commodities. This does not include buildings that are included as storage for equipment, but would conceivably include a facility that stored temporarily goods before they were packaged and moved.
  • Single purpose structures built for the sole purpose of agricultural or horticultural use - This does not include a barn but would include silos or grain storage bins.
  • Facilities used to store and distribute petroleum or primary products of petroleum with the exception of buildings and those buildings structural components.

Tax Treatment on Section 1245 Property Gains

If the sale of section 1245 property is less than the depreciation or amortization on the property, or if the gains on the disposition of the property is less than the original cost of the gains are recorded as normal income and are taxed as such. If the gain on the disposition of the section 1245 property is greater than that original cost then those gains are taxed as capital gains.

If the section 1245 property was acquired through a like-kind exchange, the amounts you claimed on the property you used in the exchange is included in the depreciation or amortization amount, as would be the amounts a previous owner of section 1245 property claimed if the adjusted basis was used as reference to your own.

Section 1250 Property

The IRS defines section 1250 property as all real property, such as land and buildings, that are subject to allowance for depreciation, as well as a leasehold of land or section 1250 property.

Tax Treatment on Section 1250 Property Gains

Much like with section 1245 property, gains on section 1250 property qualify as ordinary income if they are less than or equal to the amount the property has depreciated, and the gains exceed the depreciation then the income is treated as capital gains. During the year of the sale, depreciation recapture is taxable as ordinary income if the sale of property is executed in an installment method. 

Real World Example of Section 1231 Property

Let's say a building is bought at $2 million and then has another $2 million put into it in the form of refurbishment (updating A/C units, windows, and a new roof) with a amortization rate of 50% over 10 years. So let's say then that 10 years after the building had $2 million put into it, it is sold at a price of $6 million. The recorded gains on that sale would be $4 million dollars, not 2, because the cost of refurbishment would be capitalized on the books. That $4 million sale would be taxed as capital gains because the property was sold for more than the amount that it had depreciated.


While section 1231 was introduced in the 1954 IRS Code, the content of the tax code referring to gains received upon deposition of depreciable and real property was introduced in 1939 in section 117(j). 

  1. Real Property

    Any property that is attached directly to land, as well as the ...
  2. Section 1245

    A part of the IRS code stating that depreciable property that ...
  3. Ordinary Loss

    Any loss incurred by a taxpayer that is not considered a capital ...
  4. Section 1250

    A section of the United States Internal Revenue Service Code ...
  5. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  6. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
Related Articles
  1. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  2. Taxes

    Avoid Capital Gains Tax On Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  3. Home & Auto

    5 Things Every Real Estate Pro Knows

    Find out how to stop chasing the market and start leading it.
  4. Active Trading

    Seek Out Past Losses To Uncover Future Gains

    Tax loss carry-forwards can help reduce the tax burden of owning a profitable fund.
  5. Taxes

    Revisiting the Internet Sales Tax Bill: 2013 Vs. 2015

    Learn about the Marketplace Fairness Act of 2015 being reviewed by congress and the differences between it and the 2013 Marketplace Fairness Act.
  6. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  7. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  8. Investing Basics

    Internet Sales Tax's Effect on Interstate Commerce

    Find out how a national Internet sales tax could affect interstate commerce, and why some bigger online retailers are lobbying for such a tax.
  9. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  2. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  3. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  4. Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost ... Read Full Answer >>
  5. Are tax brackets adjusted for inflation?

    Each year, the U.S. Internal Revenue Service (IRS) adjusts tax brackets for changes in the cost of living to calculate federal ... Read Full Answer >>
  6. Can a Flexible Spending Account (FSA) be used for a spouse?

    The U.S. Internal Revenue Service (IRS) allows Flexible Spending Account (FSA) funds to be used for qualified medical expenses ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  2. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  3. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  5. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, or a bond currently trading for less than its par value in the ...
Trading Center