Capital Asset

In real estate and tax law, a capital asset generally refers to property of a permanent or long-term nature that is used in the production of income or held for investment, such as land, buildings, and certain types of equipment. These assets are not primarily held for resale but are instead used in a business or investment capacity over time. Under income tax law, capital assets are typically distinguished from inventory, which consists of property held for sale to customers in the ordinary course of a taxpayer’s trade or business, such as homes owned by a developer for resale. Many income-producing real estate properties fall under Internal Revenue Code Section 1231, often referred to as 1231 assets, which receive special tax treatment that can combine favorable aspects of capital gains and ordinary loss treatment, depending on the circumstances of sale.