Question

What is the definition of a capital asset? Why is this important from a taxing perspective? Why does “holding period” matter? What is a Section 1231 asset? What is meant by recapture?

Answer 1

A Capital Asset is an expense from which a person/company can gain benefit over more than one accounting period. It is an asset with a useful life of more than 1 year and such an asset is not intended for sale in the normal course of business.

Correct recognition of an asset is important so as to account for expense correctly. If an expense is a capital asset then such an expense should not be recorded in the Income statement and to such extent the profits of the company would not be understatded to avoid tax.

Holding Period matters in determining whether an expense is a capital asset, nature of asset and how the profits are recognizied on sale of such assets. Also such holding period determines the treatment of tax on sale on such an asset.

Section 1231 asset is a type of an asset/propery under the Internal Revenue Code which includes depreciable property and real propoerty which is held in a trade or business for more than one accounting period.

Recapture is the right given to the seller of an asset by a condition mentioned in the contract sale which allows the seller to purchase back some part or the whole of the asset after a certain period of time. Depreciation recapture means including the profit on sale of a business asset and reporting the same as income.