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Identify White Corporation's assets ordinary, capital, 1231

An ordinary asset is an asset that is held for sale in the ordinary course of a taxpayer's business (e.g. inventory) or arises from sales in the ordinary course of business (e.g. accounts receivable). Capital assets are held for investment (expecting appreciation) or are personal-use assets (e.g. a taxpayer's personal belongings). A 1231 assets is used in a trade or business or for the production of income and is held for more than one year. An asset that is used in a trade or business or for the production of income and is held for one year or less is an ordinary asset. Gains on personal use property are capital gains while losses are non-deductible.

Identify each of White Corporation's following assets as an ordinary, capital, or 1231 asset. Explain.

a. Two years ago, White used its excess cash to purchase a piece of land as an investment.
b. Two years ago, White purchased land and a warehouse. It uses these assets in its business.
c. Manufacturing machinery White purchased earlier this year.

Solution Preview

a. The land purchased by White Corporation is a long term asset held as an investment. It is not an asset used in the trade or business of White which excludes it from Sec 1231 treatment on sale. It is not ordinary because it has been held over 1 year. It is a capital asset held for appreciation, and when sold, it will be reported as a long term capital gain (or loss).

b. The land and warehouse bought two years ago are Sec 1231 assets because they are used in the production of ...

Solution Summary

The 355 word solution explains the type of asset for each part of the problem and uses examples for better understanding. In the event of sale, the character of the gain or loss is discussed for each type of asset.