Sale of depreciated vehicle

[jrze]

Purchased a vehicle in 2017 for $44,000 and took 179 deprecation.  I have used it over 50% for business for 5 years.  It is now worth $30,000 and I will not be using it for business going forward.  1. Are there any tax consequences for converting to personal use next year?  2.  If I were to sell the vehicle, would the gain be ordinary income or a capital gain?   If a capital gain, would there be any reason I could not offset against accrued capital losses?

[Mike9241]

Converting a business asset in a sole proprietorship to personal use isn't a taxable event. However, your basis in the car is reduced by "depreciation" in the event it is sold.

one way to deal with any sale is to split the $44K cost based on % business use for all the years it was used in business. a way to do this is based on business mileage to total mileage. the other portion of the $44K would be personal.

you would prorate the sales price using the same %'s (the $30K current FMV is meaningless) 

business portion 

from the business portion of the cost, you would subtract the depreciation taken to arrive at the adjusted basis - never below zero.  

business portion of the sales price - tax basis is the gain which is ordinary income (section 1245 recapture) to the extent of depreciation any excess is capital gain

personal portion

personal portion of the sales price - personal portion of the original cost is a gain or loss. any loss is a nondeductible personal loss while any gain would be long-term capital gain

gain 

[jrze]

Thank you 

[Opus 17]

I don't think you have business income unless you sell it right away.  If you convert it to personal use, it becomes personal property.

Because you used section 179, this may trigger an immediate recapture.  It's easier to explain with a simpler example.  Suppose you bought the car in 2020, claimed section 179, and used it 100% for business.  If you convert it to personal use in 2022, you have 3 years of deprecation you have to recapture (pay tax on) because the car is 5 year property and you are only entitled to 2 years of depreciation.  That recapture is taxed on your 2022 business tax return (schedule C or other, depending on the type of business). 

Because your section 179 claim was 5 years ago, but the vehicle was used less than 100% for business (I think that is implied in your question even though you didn't state it), those facts are too complicated for me to comment on the implications.  Someone else will have to advise on how to calculate this.  But you may have depreciation to recapture immediately.  If you don't have to recapture any depreciation, then your cost basis going forward in your personal vehicle is zero. 

Then later, when you sell the car, it is a personal sale only.  Your basis in the car is the adjusted basis after any recapture.  If you sell the car for more than your basis, you have a personal long term capital gain.  I don't know what you mean by "accrued capital losses."  You have to realize the loss by selling a capital investment at a loss, and it has to be a personal investment not a business one, since this would be a sale of a personal vehicle at that point.  But if you have an investment you can sell at a loss, you can offset the gain on the sale of the vehicle.  

@Hal_Al  or @rjs might be able to help with the section 179 recapture. 

[Opus 17]

I need to add something further.

I don't know enough about section 179 to give you a definitive answer.  There are two possibilities, you have to capture the depreciation immediately, or when you sell the vehicle.  However, if this is a passenger vehicle, this article suggests you recapture the depreciation immediately. 

https://arthurlander.com/recapture-depreciation-conversion-business-personal-use/

Possibility 1, immediate recapture.

Suppose that, based on 5 years of ownership and 80% business use, you are allowed depreciation of $35,200.  When you convert the vehicle to personal use, you report $8,800 as business income under depreciation recapture.  Recapture is taxed as ordinary income with a maximum of 25%.  Your basis going forward is $8,800.  If you sell later for $15,000, you have a long term capital gain of $6200.

Possibility 2, delayed recapture.

Converting the vehicle does not create a recapture issue at that time.  Later, you sell the vehicle for $15,000.  Remember, your adjusted cost basis is zero, so the entire $15,000 is your gain.  Because of recapture, the first $8,800 is taxed as depreciation recapture which is ordinary income rates with a cap of 25%, then the remaining $6200 is taxed as a long term capital gain.

So the recapture and long term gain are the same, it just changes when you pay them.  I noted above that not all section 179 property must be immediately recaptured, but I found an article that passenger vehicles must be.

Cheers

[Rick19744]

A few comments:

• Assuming your wording "converting to personal use next year" means 2022.  See bullet #8.
• You state that the vehicle was purchased in 2017.  That means that 1/2 year depreciation was taken in 2017 (half-year convention).
• You then took a full year depreciation in 2018, 2019, 2020 and 2021.
• For a 5-year depreciable vehicle, that means in 2022 you are still in the recovery period for the vehicle (still have 1/2 year depreciation remaining).
• Since you are still in the recovery period in 2022, if the vehicle use drops to 50% or less, you will have immediate depreciation recapture.
• You will need to determine the "excess" depreciation allowed and report that as ordinary income (form 4797) and this amount will be subject to SE tax (assuming SE tax is applicable).  See Publication 946 page 56 for help in this area.
• Your basis of the vehicle is also adjusted as a result of the depreciation recapture.
• If you are able to defer the drop in business use of the vehicle until 2023, then you would not have immediate depreciation recapture (just deferred).
• A vehicle is listed property