I have a single member LLC filing a schedule C. I have 2 assets and 1 one home office depreciation. The LLC was dissolved and the two assets are just being transferred to myself I still own the house.
For the two assets, I see that I can enter a date that the LLC stopped using them but I didn't "sell" them to myself so it seems like I would just indicate they are now 100% personal use but does this put the assets in a "limbo" state with the IRS since they are not actually sold? One asset used the "special depreciation" and the other the section 179. I'm not planning on selling them. Does it even matter after they are 5+ years old (computer equipment).
Similar for the home office depreciation, turbo tax allows me to enter when I stopped using it, but I assume when I eventually sell the home I will have to reconcile the the depreciation? How would I do this if the business is now dissolved?
In the case of the section 179 deduction, you have held the computer asset more than five years. There is no section 179 recapture. The asset has returned to personal use.
IRS Publication 946 page 22 states:
You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797.
In the case of the special depreciation allowance, you have not sold the asset. There is no special depreciation recapture. The asset has returned to personal use.
The same IRS publication page 26 states:
When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable.
Retain copies of your home office depreciation records. Upon the sale of the personal home, you will report the depreciation that was allowed or allowable as a home office depreciation deduction.
If you had reported under the Home Office Simplified Method, depreciation would be treated as zero and the basis of your home will not be reduced.
See IRS FAQ here.
In the case of the section 179 deduction, you have held the computer asset more than five years. There is no section 179 recapture. The asset has returned to personal use.
IRS Publication 946 page 22 states:
You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797.
In the case of the special depreciation allowance, you have not sold the asset. There is no special depreciation recapture. The asset has returned to personal use.
The same IRS publication page 26 states:
When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable.
Retain copies of your home office depreciation records. Upon the sale of the personal home, you will report the depreciation that was allowed or allowable as a home office depreciation deduction.
If you had reported under the Home Office Simplified Method, depreciation would be treated as zero and the basis of your home will not be reduced.
See IRS FAQ here.
Hi James,
Thank you for your excellent answer answer, it really helps clarify things. My wording was poor though when I said "Does it even matter after they are 5+ years old (computer equipment)." The asset I used the special depreciation for is 5+ years old (although from what you said, it doesn't matter), however the asset I did the section 179 deduction is 3 years old. In turbo tax, when I select that I stopped using that asset and then enter the date I disposed of it, it asks me if special handling is required and I selected Yes as listed below is "returned to 100% personal use", it then says my depreciate deduction is zero and does not say I'm subject to recapture. I assume that returning to 100% use avoids the recapture however my original question was, say later I sell that asset personally, am I personally subject to the recapture rule even though the business is terminated? And if so, can that just be avoided if I wait a full 5 years even though it's not being used by the (no longer existent) business in the last 2?
Thanks for clarifying about the house depreciation. I did not use the simplified method so I will make sure to save my records.
If at any point in the next five years you sell the asset then yes, you are subject to depreciation recapture even though it was converted to personal use.