Recall this was our abbreviated netting map from the last video.

We had four categories of capital gains and

losses, one short term category and three long term categories.

So, at 28%, which was for collectibles, at 25% which was for

unrecaptured section 1250 gains, and the zero, 15, 20% category,

which was mainly for stocks and personal use assets held long term.

Then we had our ordinary income or loss category.

Now, with Section 1231,

we'll add one column to the left of the Short-Term Capital Gain or Loss column.

We put it to the left because after we net within this column, and

then have to net across columns, where we go in the netting procedure will

depend on whether we have a net Section 1231 Gain Or loss in this column.

If we have a net Section 1231 Gain, we first have to check

whether we had any section 1231 losses in the last five years.

If we did, then any net Section 1231 Gains

up to the last five years' worth of Section 1231 losses,

will be classified as ordinary income, and thus moved to the rightmost column.

However, any gains that survive the look back loss,

if any, that is, if the net section 1231 gain is larger than

any section 1231 losses over the last five years, and this year, for that matter.

We'll then eventually move to the 0/15/20% long-term capital gain column.

On the other hand, if we obtain a net loss in the Section 1231 column,

it is simply an ordinary loss and in the netting process,

you'll take that loss and put it in the ordinary loss column.

So, take a look at the 0/15/20% column and the ordinary income or loss column.

Note that any net 1231gains will go into the 0/15/20% column and

will receive preferential tax rate treatment while any net 1231 losses,

as well as any reclassified 1231 gains due to

the look back loss rule will end up in the ordinary column.

So to illustrate how these Section 1231 Gains and losses are netted and

how the look back loss rules work, let's do a detail example.