Section 1231 Property: Definition, Examples & 2025 Tax Treatment in Australia

Understanding how different types of property are taxed can have a major impact on your investment returns and business outcomes. While Section 1231 property is a term from the US Internal Revenue Code, it’s increasingly relevant for Australians involved in cross-border investments, US property deals, or multinational business operations. Here’s what Section 1231 property means, how it’s classified, and why its tax treatment matters for Aussies in 2025.

What Is Section 1231 Property?

Section 1231 property refers to certain assets held for business or investment purposes, typically for more than one year, that are eligible for favourable tax treatment when sold. In the US tax system, Section 1231 property includes:

• Depreciable business assets (like plant, equipment, and machinery)

• Real property used in a trade or business (such as commercial buildings, factories, and farmland)

• Timber, coal, and iron ore (if owned for business purposes)

The key distinction is that Section 1231 property is not personal-use property (like your family home or personal car) or inventory held for sale to customers.

Real-World Examples for Australians

While Section 1231 is a US tax concept, it’s relevant for Australians who:

• Own property or businesses in the US

• Invest in US real estate or commercial ventures

• Are Australian expats managing American business assets

Example 1: An Australian company owns a logistics warehouse in Texas, purchased in 2020 and sold in 2025. The warehouse, used for business, qualifies as Section 1231 property.

Example 2: An Aussie investor acquires US farmland and leases it for agricultural production. After three years, they sell the land. The farmland is Section 1231 property since it was used in a trade or business.

In both cases, the property isn’t held as inventory, nor is it personal-use. It’s used in business, and held for more than a year – the main criteria.

Tax Treatment: How Section 1231 Works in 2025

The appeal of Section 1231 property is its special tax treatment upon sale:

• Net Gain: If the total gains from all Section 1231 property sales in a year exceed total losses, the net gain is taxed at the long-term capital gains rate (currently lower than ordinary income tax rates in the US).

• Net Loss: If total losses exceed gains, the net loss is treated as an ordinary loss – fully deductible against other income (like salary or business profits).

This ‘best of both worlds’ scenario is a major advantage. For Australian investors, the benefits depend on tax treaties and how foreign income is taxed at home. The Australia-US tax treaty generally allows foreign tax credits to prevent double taxation, but you must report US-source income to the ATO.

2025 Update: The US Tax Cuts and Jobs Act changes from previous years remain in effect for 2025, with long-term capital gains rates holding steady (0%, 15%, or 20% depending on income). For Australians, any capital gain or loss from Section 1231 property should be reported in both the US and Australia, with careful attention to currency conversion and timing rules.

What Should Australians Watch Out For?

• Recapture rules: Some depreciation claimed on US assets may be ‘recaptured’ and taxed at higher rates when you sell.

• Reporting requirements: Both the IRS and the ATO have strict rules for reporting foreign asset sales. Failing to comply can lead to hefty penalties.

• Tax credits: Ensure you claim foreign tax credits correctly to avoid paying tax twice.

Tax treatment for Section 1231 property can be complex, especially when factoring in cross-border issues. While the concept is American, it’s vital for Australians doing business or investing in the States.