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  1. Loss gain and carryover. Tax in ordinary part

The lookback provision states that the net Section 1231 gains must be offset by net Section 1231 losses from the five preceding tax years that have not previously been recaptured. To the extent of these losses, the net Section 1231 gain is treated as ordinary income. The $75,000 gain in Year 3 was recaptured as ordinary income by $50,000 of the Year 1 loss and $25,000 of the Year 2 loss. Note that $5,000 of the Year 2 loss remains unrecaptured. The $80,000 gain is recaptured as ordinary income to the extent of the $5,000 remaining Year 2 loss, $20,000 Year 4 loss, and $30,000 Year 5 loss for a total of $55,000. The remaining $25,000 gain is treated as a Sec. 1231 gain.