1231 Property is a category of property defined in section 1231 of the U.S. Internal Revenue Code. 1231 property includes depreciable property and real property (e.g. buildings and equipment) used in a trade or business and held for more than one year. Some types of livestock, coal, timber and domestic iron ore are also included. It does not include: inventory; property held for sale in the ordinary course of business; artistic creations held by their creator; or, government publications. History The 1954 version of the Internal Revenue Code included section 1231 covering certain property held by a business. The original section covering this matter - namely, section 117(j) of the Internal Revenue Code of 1939 - was enacted in 1942. The law was originally conceived as a way to help the shipping industry during World War II. The present version of the Internal Revenue Code has retained section 1231, with the provision now applying to both property lost in an involuntary conversion, and to the sale or exchange of certain kinds of business-use property. Application A taxpayer can calculate net 1231 gains and losses, often referred to as the hotchpot, as capital gains, with the caveat that if the gain is less than any “non-recaptured losses” from the preceding five years, it is re-characterized as ordinary income and is reported with Form 4797. “Non-recaptured loss” is covered by 1231(c). This provision refers to a situation when a taxpayer claims a 1231 loss in year one, but seeks a 1231 gain in any of subsequent years two through six. Any gain which is less than or equal to the loss in year one will be characterized as ordinary income rather than long-term capital gain (which has preferred tax rates). Gains and losses under 1231 due to casualty or theft are set aside in what is often referred to as the fire-pot (tax). These gains and losses do not enter the hotchpot unless the gains exceed the losses. If the result is a gain, both the gain and loss enter the hotchpot and are calculated with any other 1231 gains and losses. If there are more casualty loss(es) than gains, the excess is treated as an ordinary loss. Impact Section 1231 treatment allows taxpayers to enjoy tax-favored treatment for 1231 property gains that are greater than 1231 property losses. This means that if the asset can be sold for a value greater