How Are Capital Gains Taxed on Sale of Depreciable Assets?
Depreciable assets have special capital-gains rules. When assets form part of a depreciable block, the computation is based on the block's written-down value and transfer consideration rather than the normal asset-by-asset holding-period method.
Quick Answer
Capital gain is generally determined by comparing the transfer consideration with the applicable cost and eligible expenses, then applying the holding-period classification and rate rules for the relevant asset and tax year. Special provisions can change the result for particular assets. The relevant asset or transaction named in this question should be identified before applying the capital-gains computation and rate rules. This page specifically addresses “How Are Capital Gains Taxed on Sale of Depreciable Assets”.
Why depreciable assets are special
Depreciation has already reduced the tax basis of assets used in a business. The capital-gains rules therefore use a special block-of-assets mechanism rather than simply comparing the sale price with the original purchase price of each asset.
When does a gain arise?
Under the special rule, where the consideration from transfer of one or more assets in a block exceeds the relevant written-down value and eligible additions/transfer expenses, the excess can be deemed to be short-term capital gain.
What if the entire block ceases to exist?
Where all assets in a block are transferred during the tax year, the statutory computation compares the transfer consideration with the block's relevant written-down value and additions, subject to the applicable rules.
Example
A business may have several assets in the same depreciation block. If some assets are sold and the aggregate consideration exceeds the relevant block value after the statutory adjustments, the resulting excess can be treated as short-term capital gain even if one particular asset was held for many years.
What records are needed?
- Opening written-down value of the block
- Asset acquisition invoices
- Depreciation schedule
- Sale invoices
- Transfer expenses
- Details of assets added or removed from the block
Related EZTax Questions
- What Is Capital Gain in Income Tax?
- What Is Short-Term and Long-Term Capital Gain?
- How to Calculate Capital Gain From Shares?
- What Is Cost of Acquisition for Capital Gains?
- Which ITR Form Should I Use for Capital Gains?
