Quote from @Account Closed:
Quote from @Mitch Rapp:
I see differing opinions as to whether a loss from a sale of a rental property is a capital loss or ordinary loss. Section 1231 seems to indicate it should be an ordinary loss. Can you clarify?
Also, does inherited rental property held for less than 1 year still qualify under 1231? I heard that the greater than 1 year holding is based on how long my parents held it, not based on how long I held it.
Mitch - Thanks very much for participating in the discussion. Here's some information I've compiled which I'm hoping will be helpful:
Section 1231 of the Internal Revenue Code addresses the treatment of gains and losses from the sale or exchange of property used in a trade or business. Typically, gains from the sale of such property are treated as long-term capital gains, while losses are treated as ordinary losses.
If a rental property is held for more than one year, any resulting loss would generally be treated as a long-term capital loss. If the property is held for one year or less, the loss would typically be considered a short-term capital loss.
Regarding inherited property, the holding period is generally determined by how long the property was held by the decedent (the person from whom you inherited the property). If the decedent held the property for more than one year, and you sell it within one year of inheriting it, the gain or loss would typically be treated as long-term.
Lastly, it's imperative to consult with a tax expert that can tailor advice unique to your circumstances and tax laws applicable to your jurisdiction.
Feel free to reach out with any further questions/concerns.
Sincerely.
Thank you for the clarification on the holding period.
Can you clarify if rental property is considered to be 1231 property? Your explanation of rental property sale losses being capital (not ordinary) losses implies that it is not considered 1231 property.
But IRS Publication 544 states:
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 must also 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).
