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IRS.gov Website
Publication 225
taxmap/pubs/p225-038.htm#en_us_publink1000218452

Chapter 9
Dispositions of Property Used
in Farming(p56)

taxmap/pubs/p225-038.htm#en_us_publink1000275383Introduction

When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions.
When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain.
Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported.

taxmap/pubs/p225-038.htm#TXMP32170ae0

Useful items

You may want to see:


Publication
 544 Sales and Other Dispositions
of Assets

Form (and Instructions)
 4797: Sales of Business Property
See chapter 16 for information about getting publications and forms.
taxmap/pubs/p225-038.htm#en_us_publink1000218453

Section 1231
Gains and Losses(p56)

rule
Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year.
taxmap/pubs/p225-038.htm#en_us_publink1000218454

Table 9-1. Where to First Report Certain Items on Form 4797

Type of propertyHeld 1 year
or less
Held more than
1 year
1Depreciable trade or business property:  
 a  Sold or exchanged at a gain Part IIPart III (1245, 1250)
 b  Sold or exchanged at a loss Part IIPart I
2Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:  
 a  Sold at a gain Part IIPart III (1252)
 b  Sold at a loss Part IIPart I
3All other farmlandPart IIPart I
4Disposition of cost-sharing payment property described in section 126Part IIPart III (1255)
5Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes:Held less
than 24 mos.
Held 24 mos.
or more
 a  Sold at a gain Part IIPart III (1245)
 b  Sold at a loss Part IIPart I
 c  Raised cattle and horses sold at a gain Part IIPart I
6Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes:Held less
than 12 mos.
Held 12 mos.
or more
 a  Sold at a gain Part IIPart III (1245)
 b  Sold at a loss Part IIPart I
 c  Raised livestock sold at a gain Part IIPart I
EIC
If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Do not take that gain into account as section 1231 gain.
taxmap/pubs/p225-038.htm#en_us_publink1000218457

Section 1231 transactions.(p57)

rule
Gain or loss on the following transactions is subject to section 1231 treatment.
EIC
If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. See Table 9-1.
taxmap/pubs/p225-038.htm#en_us_publink1000218459

Property for sale to customers.(p57)

rule
A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers.
taxmap/pubs/p225-038.htm#en_us_publink1000218460

Treatment as ordinary or capital.(p57)

rule
To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year.
taxmap/pubs/p225-038.htm#en_us_publink1000218461
Nonrecaptured section 1231 losses.(p57)
Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period.
taxmap/pubs/p225-038.htm#en_us_publink1000218462

Example.(p57)

In 2012, Ben has a $2,000 net section 1231 gain. To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. From 2007 through 2011 he had the following section 1231 gains and losses.
Year Amount
2007-0-
2008-0-
2009($2,500)
2010-0-
2011$1,800

Ben uses this information to figure how to report his net section 1231 gain for 2012 as shown below.
1)Net section 1231 gain (2012)$2,000
2)Net section 1231 loss (2009)($2,500) 
3)Net section 1231 gain (2011)1,800 
4)Remaining net section
1231 loss from
prior 5 years
($700) 
5)Gain treated as
ordinary income
$700
6)Gain treated as long-term
capital gain
$1,300
His remaining net section 1231 loss from 2009 is completely recaptured in 2012.