I had an extra car at the end of last year. It used to be my primary personal car, but I got a new one. Rather than sell the extra car, I signed a contract with a company. They operate out of airports, and their business model is people drop their cars off and they rent them out to other people. The contract I signed put the car at their disposal for a year. I was to be paid a daily rate any day they actually rented the car out. The contract also stipulated a monthly minimum payment and various bonuses. I have two questions:
First: When I began this contract last year, I determined that this represented putting the car 100% in service to my business (I formed an LLC). The car was no longer parked at the house and no longer available whatsoever for personal use. So I took the car's fair market value and begin depreciating the car as an asset (5Y SL, I believe). Fast forward to this summer. After making money for about six months, the car was involved in an incident and declared a total loss. Because of the car shortage, the market value of the car actually increased and the insurance payout was higher than the fair market value at the time I placed the car in service. How does this unusual situation - an asset that appreciated rather than depreciated - affect my taxes? Do I have to pay tax on the excess value? Does this get reported as a disposition of asset? Does the fact that it was not always in service to the business matter?
Second: Would the income this enterprise generated be considered passive income?
Thank you!
