When am I allowed to depreciate my vehicle after finalizing a rent-to-own "Agreement" covering a multiple year period?

[DUKE-TLG]

In 2019 I offered a vehicle which I used for both business and person purposes over the previous seven years to an individual on a rent-to-own basis.  The individual was never obligated to purchase the vehicle though he did have the option to purchase the vehicle (with all of the proceeds being applied as a principal reduction) and/or simply return it and walk away.   The intent was the individual would exercise his option to purchase the vehicle sometime prior to mid 2021,  he was expressly recorded as a renter/lessee.  Title was never intended to be transferred to the individual until I was paid the full amount noted in the "Agreement."  

Notably, had the individual elected not to pay off the vehicle, I fully understood I would be required to report any proceeds received as "rental income."  The vehicle was paid off earlier in 2021 and the question I pose now is, for depreciation purposes, against what tax year should I take the write-off: (1) in 2019 originally when we entered into the "Agreement" or (2) in 2021 when I title was transferred immediately after full payment to me was finally executed?  

The transaction was established to accommodate the individual who was unable to initially pay cash up front for the vehicle and/or either did not want to take out or was unable to either qualify for a car loan.  

[MarilynG1 · Accepted solution]

In 2019, you could have claimed the income/expenses on a Schedule C, as Business Income/Expenses.  If you set up the vehicle as a Business Asset, you would receive depreciation each year. You could Amend your 2019 return to do this. 

If you do this, in 2021 you would report the sale as 'Sale of a Business Asset' and any Gain/Loss would be calculated on the original cost you entered for the asset, less any depreciation taken, and the sale price of the vehicle. 

If this applies, click this link for Renting a Vehicle.