What is Section 1231 property?

What qualifies

The publication lists the transactions that get section 1231 treatment: sales or exchanges of real property or depreciable personal property used in a trade or business and held longer than 1 year, including property held for the production of rents or royalties; leaseholds used in business and held longer than 1 year; cattle and horses held for draft, breeding, dairy, or sporting purposes for 2 years or longer; other livestock, not poultry, held for those purposes for 1 year or longer; unharvested crops sold with the land; timber, coal, and iron ore disposals treated as sales; condemnations of business property or capital assets held in connection with a business or investment; and certain casualties and thefts of business or investment property held longer than 1 year.

What does not qualify

Property held mainly for sale to customers is not section 1231 property. The publication’s test is whether you will get back all or nearly all of your investment by selling the property rather than by using it up in the business. Self-created patents, designs, formulas, copyrights, and similar property produce ordinary income instead. So does property you deducted under the de minimis safe harbor: in the publication’s example, a machine bought for $1,000 and expensed in 2025, then sold in 2027 for $1,500, produces $1,500 of ordinary gain reported on line 10 of Form 4797. Property used for personal purposes is also outside the rule.

Selling business property: ordinary or capital?

This is the question most owners actually have. The publication says depreciable property and real property used in your business are not capital assets, yet a net gain from section 1231 transactions is generally taxed as long-term capital gain. Two steps decide the answer. First, take out depreciation recapture. Gain on section 1245 property, which includes personal property and certain other tangible property, is ordinary income to the extent of the depreciation and amortization allowed or allowable, and only the excess is section 1231 gain. Gain on section 1250 property, which is depreciable real property that was never section 1245 property, is ordinary only to the extent of additional depreciation, meaning depreciation beyond the straight-line amount. Second, net the remaining section 1231 gains and losses for the year.

The five-year lookback

A net section 1231 loss is an ordinary loss, which is favorable. To stop owners from taking ordinary losses in one year and capital gains the next, a net gain is ordinary income up to the nonrecaptured section 1231 losses from the previous 5 tax years, applied beginning with the earliest loss. The publication’s example: a $2,000 net gain in 2025, a $2,500 loss in 2022, and a $1,800 gain in 2024 leaves $700 of the old loss unrecaptured, so $700 is ordinary and $1,300 is long-term capital gain.

Worked example from the publication

A business truck costs $10,000. MACRS deductions total $2,000, $3,200 and $960, or $6,160, leaving an adjusted basis of $3,840. It sells for $7,000, a realized gain of $3,160. The ordinary income is the lesser of the $6,160 depreciation or the $3,160 gain, so the entire $3,160 is ordinary income and nothing is left as section 1231 gain. Enter cost 10,000, depreciation 6,160, and amount realized 7,000 above to see it. Now keep the same truck but sell for $12,000: the gain is $8,160, $6,160 is ordinary recapture, and $2,000 is section 1231 gain that is capital unless prior losses apply. The calculator treats the sale as your only section 1231 transaction.

Reporting and records

Show section 1231 gains and losses in Part I of Form 4797. A net gain carries to Schedule D as long-term capital gain, reduced by any nonrecaptured losses reported as ordinary gain in Part II. A net loss carries to Part II as an ordinary loss. Ordinary income from depreciation is figured in Part III. The publication stresses that you must keep permanent records of date acquired, cost, depreciation and amortization, and all basis adjustments, because recapture depends on depreciation allowed or allowable. If you took no depreciation at all, allowable depreciation is figured as straight-line for recapture purposes.

Mistakes to avoid

The common errors are treating the whole gain on a depreciated asset as capital, forgetting the five-year lookback, mixing inventory with section 1231 property, and skipping the records needed to prove depreciation. Casualty gains and losses have their own netting rule, so they should be handled with Form 4684 and Pub. 547. A tax professional should review any sale involving buildings, because the unrecaptured section 1250 gain worksheet can affect the rate on the capital portion.

Related Publication 544 topics

More from the same IRS publication: What is a like-kind exchange?, Is gain on a capital asset sale taxable?, What is the long-term holding period?. Related tools on this site: depreciation recapture calculator, section 179 and bonus depreciation estimator.

Sources

• IRS Publication 544, Sales and Other Dispositions of Assets (2025): sections “Section 1231 Gains and Losses”, “Depreciation Recapture”, “Section 1245 Property”, “Section 1250 Property”, “Form 4797”, “Noncapital Assets”. Read November 2, 2026.

Edition read: Publication 544 (2025), for use in preparing 2025 returns. Dollar limits and rates in this publication are for 2025; the publication notes that later legislation (P.L. 119-21) may affect federal rules, so check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.