What is the difference between an ordinary, capital, and Section 1231 asset? Why is this distinction important? What assets are subject to depreciation recapture? Compare and contrast Section 1245 and Section 1250 recapture.
What is the difference between an ordinary, capital, and Section 1231 asset? Why is this distinction important?
An ordinary asset is any asset that is not a capital asset or a business asset. I don't believe there is a specific code definition for an ordinary asset, but they would what is left after excluding capital and business (Sec 1231) assets. Examples of ordinary assets would include cash, accounts receivable, most inventories, prepaid expenses, office supplies and others. In general, these assets are classified as current (or short-term) assets on a balance sheet.
A capital asset is defined as any property (whether a business asset or not) except the following as discussed in Code Section 1221: Inventory, accounts receivable, derivatives, supplies but also depreciable business property and real property used in a trade or business. The holding period is not part of the definition because capital assets can be held for either short term or long term periods of time. There are other assets excluded from the capital asset category including copyrights, musical or artistic compositions, patents and inventions are clearly capital assets.
A Sec 1231 asset consists of any depreciable asset used in a trade or business and held for over one year. This includes real and ...
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