Also known as: capital assets
Written by attorneys · grounded in primary & secondary sources — see below
A long-term asset used in the operation of a business or used to produce goods or services. For income-tax purposes, the term covers property held by the taxpayer except those assets specifically excluded by the Internal Revenue Code, such as inventory and property held primarily for sale to customers in the ordinary course of a trade or business.
Cameron Cruz and Cade Carpenter divorce after a ten-year marriage. The court must equitably apportion their property without regard to misconduct. In deciding the division, the judge weighs each spouse's opportunity to acquire capital assets and income in the future, including Cameron's established professional practice that generates investment property and Cade's limited earning history after years as a homemaker.
Connor Clark operates a family farm and sells a tractor he used for twelve years in his business. The tractor qualifies as a capital asset because it is property held by the taxpayer and is not inventory or property held primarily for sale to customers. The resulting gain is therefore eligible for long-term capital gain treatment rather than ordinary income treatment.
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Section 1221 defines a capital asset as property held by the taxpayer except for specifically listed exclusions such as inventory and property held primarily for sale to customers in the ordinary course of business. The definition therefore reaches most investment assets such as securities and real estate acquired for appreciation.
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Only gains from the sale or exchange of a capital asset held for more than one year receive the preferential long-term capital gain rates. Ordinary income is taxed at higher rates, so the scope of the capital asset definition directly determines the tax outcome on a disposition.
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Real estate used in a trade or business is generally a capital asset unless it falls within an exclusion, such as property held primarily for sale to customers. Dealer status turns on whether the taxpayer's primary purpose is to sell the property rather than to use it in operations.
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Under the Uniform Marriage and Divorce Act, a court apportioning marital property must consider each spouse's opportunity for future acquisition of capital assets and income. This factor helps the court achieve an equitable division that accounts for earning capacity after the marriage ends.
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