LLC (husband and wife) will remain in existence in future for liability reasons although no business is conducted. I think but would like to confirm that a sale of exchange of business assets that were converted to personal use is reported at FMV and gain, if any, would be subject to ordinary income treatment due to depreciation recapture.
Not sure. I guess I can file a final 1065 for the LLC or continue to file returns in future with zero activity. Doing the latter would allow the LLC to report the eventual sale of the assets they continue to own although they are used personally by members.
Regarding depreciation recapture -
My current understanding is - It appears assets that have been depreciated with "special depreciation allowance" could have recapture once they are converted to personal use. Recapture would be depreciation claimed in excess over SL depreciation even though no disposition. This would be in addition to 1245 recapture if asset sold for gain at later date. This is based on what I read today.
Thanks Rick - original statement should have said 'sale or exchange'. No sale took place but I did not know if an exchange was deemed to take place if assets of LLC were converted to personal use. In essence, LLC operated as business for several years and in 2017, Members decided not to operate business any longer and use the assets personally. Title of assets throughout 2017 is with LLC as they were not distributed to members. It appears to me that depreciation recapture does not occur until assets are sold by LLC and then only if sold at a gain. However, when assets are converted from business to personal use, it appears there is a requirement to convert depreciation to SL and the cumulative accelerated depreciation in excess of SL depreciation is reported as ordinary income. Is my understanding correct?
ok. No distribution of assets. Are we talking vehicles here?
Only asset was a boat that was used in charter (captain and crew providing services) - US and Bahamas.
Based on the updated facts, you are correct in that any depreciation recapture is not recognized until the asset is sold.
However, you are also correct in that you do need to pick up ordinary income on "excess" depreciation when business use drops to 50% or less. Don't forget that this "excess" includes any Section 179 or bonus depreciation you may have taken as well.
As a side note, love cruises and became spoiled with 3 cruises on the SeaDream.
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