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

Definition of a capital asset
A capital asset is defined to include property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Thus, land and building, plant and machinery, motorcar, furniture, jewellery, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, securities, units, mutual funds, zero-coupon bonds etc. are capital assets.

Capital Asset is important from a taxing perspective

Capital assets are defined differently when viewed from a tax perspective. For tax purposes, a capital asset is all property held by a taxpayer, with the exceptions of inventory and accounts receivable.

“holding period” matter

Long-term gains on most assets are taxed at lower rates than are short-term gains or ordinary income. Under the current law, an asset has a long-term holding period if it has been held, or is deemed to have been held, for more than one year.

Section 1231 asset

1231 property, defined by section 1231 of the U.S. Internal Revenue Code, is real or depreciable business property held for over a year. Section 1231 property includes buildings, machinery, land, timber and other natural resources, unharvested crops, cattle, livestock and leaseholds that are at least a year old, but does not include poultry, trademarks, or inventory.

Recapture

A condition set by the seller of an asset that gives him/her the right to purchase back some or all of the assets within a certain period of time.