Cost Basis

[tbrgrandma]

A long-haul trucker (owner operator) with a sole proprietorship (files a Schedule C bought a used tractor Dec 16, 2020for $202,995.  It was used 100% for business hire (never personal).  The total depreciation (reported on taxes) as of Dec 31, 2021 is $135,300.  During ownership, the only improvements were the replacement of the generator for $3500.00. On Feb 18, 2022, the tractor caught fire and was declared a total loss.  Insurance valued the tractor at $204,000.  The insurance paid off the balance owing of $187,000 and paid the trucker $17,000.  I need help figuring the cost basis of the tractor for 2022 tax return

[Carl]

Basically, your coat basis is what you paid for it, plus the cost of improvements, minus the total depreciation taken up to the date of total loss.
Anything paid by insurance over that cost basis is taxable income.

When reporting this, you report the sale of the truck for the insurance payout amount, because that's what you did; the insurance company purchased the truck from you.

[Mike9241 · Accepted solution]

your cost basis is what you paid originally. in addition, you would add the cost of the generator if you capitalized it. if you expense it as a repair, it does not affect basis. for this example, I'll assume you capitalized it

you took depreciation of $135,300 through 12/31/2021. don't know whether this includes depreciation on the generator, it should if you capitalized it.  if it does total basis is as follows

original cost 202995

generator         3500

total cost      206495

depreciation 

2021           -135300

2022      -   unknown but depreciation is allowed for 2022 based on disposal date 2/18/2022

the net is your basis

sales price is  204000

gain is difference between sales price and basis which will show up on form 4797 and be treated as 1245 recapture

the payoff of the loan has no effect on the gain.

[Anonymous_]

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@Carl wrote:

....your coat [sic] basis is what you paid for it, plus the cost of improvements, minus the total depreciation....

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Just to clarify terms, cost basis is the purchase price plus the cost of any improvements to the property. 

What is described in the above-quoted line is the adjusted basis.