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What is Section 1231?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 11 September 2016
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Section 1231 is a part of the United States tax code that covers certain types of property used by businesses and how they may be handled for tax purposes. Under Section 1231, gains and losses on property classified as 1231 property are treated specially, providing businesses with access to tax advantages. However, this section of the tax law is quite complex and it is advisable to use a tax accountant to determine what property held by a business qualifies and to ensure that taxes are filed correctly.

This addition to the tax code was originally made during the Second World War to provide some benefits to businesses struggling in the wartime economy. It was later adjusted and expanded. Under Section 1231, property sold, traded, or subjected to involuntary conversion, such as loss or destruction, can be accounted for in special ways on tax returns. Gains can be treated as capital gains, qualifying people for a reduced tax rate, while losses are treated as ordinary losses for deduction purposes.

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There are some caveats involved. If a taxpayer has been claiming depreciation on Section 1231 property to offset tax liability, that property is subject to depreciation recapture. Profit from the sale of the property is treated as ordinary profit. The property must also be held for at least a year. Because the tax code changes periodically, it is important to make sure that tax documentation from the appropriate year is used and that 1231 property is properly accounted for to avoid situations where taxes are filed erroneously and must be amended to make corrections.

Examples of property that qualifies under Section 1231 include machinery, buildings, land, leases, and livestock. If people are not sure about whether or not a business asset falls under Section 1231, they can consult a tax specialist to get information. Tax specialists may also have additional tips to help businesses reduce tax liability while remaining within the tax code so they do not violate the law or attract attention of Internal Revenue Service (IRS) auditors.

Property that does not fall under the purview of Section 1231 may be eligible for different tax benefits for the business. Detailed listings of tax benefits for businesses are often available through chambers of commerce and professional organizations. The IRS also publishes pamphlets and other materials to help taxpayers and businesses file their taxes accurately and completely, including documentation on how to access business tax benefits.

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