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.
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