Property Transactions: Gains, Losses & Like-Kind Exchanges

Why this topic matters

Once basis is known, Taxation and Regulation (REG) asks how gains and losses are characterized (capital, Section 1231, or ordinary), when they can be deferred (like-kind exchanges, involuntary conversions), and when they are excluded (home sales, qualified small business stock). Character drives the tax rate, so this topic ties directly to individual and entity taxation.

Realized versus recognized gain

• Amount realized = cash + fair market value (FMV) of property received + liabilities assumed by the buyer − selling expenses.
• Realized gain or loss = amount realized − adjusted basis.
• Recognized gain or loss = the portion reported on the return (after deferral or exclusion rules).
• Losses on personal-use property are not deductible (except casualty losses in declared disasters); gains are taxable.

Capital assets and holding period

A capital asset is any property except: inventory; accounts and notes receivable from the business; depreciable property and real property used in a trade or business (these are Section 1231 assets); copyrights and creative works held by the creator; and certain government publications. Investments (stocks, bonds) and personal-use assets (a home, a car) are capital assets.

• Long-term: held more than one year. Short-term: one year or less.
• Inherited property is always long-term; gifts and like-kind property usually "tack" the prior holding period.

Netting and rates for individuals

1. Net short-term gains and losses; net long-term gains and losses.
2. Net the two results against each other.
3. A net capital loss is deductible against ordinary income up to $3,000 per year ($1,500 married filing separately); the rest carries forward indefinitely, keeping its character.

Type of gain	Maximum rate
Short-term capital gain	Ordinary income rates (up to 37%)
Long-term capital gain and qualified dividends	0%, 15%, or 20% by taxable income. For 2026, 0% applies up to $49,450 (single) / $98,900 (married filing jointly); 20% applies above $545,500 / $613,700.
Unrecaptured Section 1250 gain (straight-line depreciation on real property)	25%
Collectibles (art, coins) and the taxable part of Section 1202 gain	28%

The net investment income tax (NIIT) of 3.8% applies to investment income (including capital gains) for modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) — thresholds not indexed.

Corporations have no preferential capital gain rate (21% flat), may deduct capital losses only against capital gains, and carry net capital losses back 3 years and forward 5 years as short-term losses.

Business property — Sections 1231, 1245, and 1250

• Section 1231 property: depreciable property and real property used in a trade or business, held more than one year. Net Section 1231 gains are treated as long-term capital gains; net losses are ordinary — the best of both worlds.
• Five-year lookback: a net Section 1231 gain is recaptured as ordinary income to the extent of net Section 1231 losses deducted in the prior 5 years.
• Section 1245 recapture (personal property — equipment, vehicles, Section 197 intangibles): gain is ordinary to the extent of all depreciation taken (including Section 179 and bonus); any excess is Section 1231 gain.
• Section 1250 (real property): for individuals, real property depreciated under the Modified Accelerated Cost Recovery System (MACRS) uses straight-line depreciation, so there is no ordinary recapture — but the gain equal to depreciation is unrecaptured Section 1250 gain taxed at up to 25%.
• Section 291 (corporations only): 20% of the straight-line depreciation on real property is recaptured as ordinary income.

Like-kind exchanges (Section 1031)

• Since 2018, available only for real property held for business or investment, exchanged for like-kind real property (any real property for any US real property; foreign and US real property are not like-kind). Personal property no longer qualifies.
• Not available for inventory, dealer property, or a personal residence.
• Deadlines: identify replacement property within 45 days, and receive it within 180 days (or the return due date, if earlier), usually through a qualified intermediary.
• Recognized gain = the lesser of realized gain or boot received. Boot is cash and non-like-kind property received, plus net liability relief (liabilities the other party assumes minus liabilities you assume). Losses are never recognized.
• Basis of new property = FMV of new property − deferred gain (or: adjusted basis given + boot paid + gain recognized − boot received).
• Related-party exchanges: gain is triggered if either party disposes of the property within 2 years.

Involuntary conversions (Section 1033)

• Gain from casualty, theft, or condemnation may be deferred by reinvesting in similar property; recognized gain = amount realized not reinvested (limited to realized gain). The election is optional.
• Replacement period: 2 years after the end of the tax year of the gain; 3 years for condemned business or investment real property (and 4 years for a principal residence in a federally declared disaster).
• Basis of the replacement = cost − deferred gain. Losses are recognized (not deferred).

Sale of a principal residence (Section 121)

• Exclude up to $250,000 of gain ($500,000 for married filing jointly, if either spouse meets ownership and both meet use).
• Must have owned and used the home as a principal residence for 2 of the 5 years before the sale; usable once every 2 years.
• A reduced exclusion applies for sales caused by a change of employment, health, or unforeseen circumstances.
• Gain attributable to depreciation after May 6, 1997 (for example, a home office) is not excluded; periods of nonqualified use after 2008 reduce the exclusion.

Other rules

• Wash sales: a loss on stock or securities is disallowed if substantially identical securities are bought within 30 days before or after the sale. The disallowed loss is added to the basis of the new shares, and the holding period tacks.
• Related-party losses (Section 267): losses on sales to related parties (family members — siblings, spouses, ancestors, lineal descendants — and entities more than 50% owned) are disallowed. The buyer may use the disallowed loss to reduce later gain on resale, but not to create a loss.
• Installment sales: gain is recognized as payments are received (gross profit percentage × principal received); depreciation recapture is recognized in the year of sale; not available for inventory, dealers, or publicly traded securities.
• Qualified small business stock (Section 1202): for stock issued after July 4, 2025, the One Big Beautiful Bill Act (OBBBA) allows a tiered exclusion — 50% after 3 years, 75% after 4 years, and 100% after 5 years — with a per-issuer cap of $15 million and a corporate gross asset limit of $75 million (earlier stock: 100% after 5 years, $10 million cap).
• Small business stock losses (Section 1244): ordinary loss up to $50,000 ($100,000 married filing jointly) for original holders.

How it is tested

• Characterize gains on business property (Sections 1245, 1250, 1231).
• Compute recognized gain and new basis in a like-kind exchange.
• Apply the Section 121 exclusion and involuntary conversion deferral.
• Apply wash sale and related-party loss rules.