How do changes in tractor ownership affect ongoing depreciation claims?
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Changes in tractor ownership—such as selling, trading, gifting, or otherwise disposing of a tractor—have significant tax consequences for ongoing depreciation claims. The treatment depends on the nature of the change in ownership and the method of depreciation used. Below is a comprehensive analysis of the relevant rules, with references to the Internal Revenue Code, Treasury Regulations, and IRS guidance.
1. Sale, Exchange, or Other Disposition of a Tractor
a. End of Depreciation Deductions
When a tractor is sold, exchanged, or otherwise disposed of, the taxpayer must stop claiming depreciation on that asset as of the date it is no longer owned or used in the business. Depreciation is only allowable for the portion of the year the property was in service and owned by the taxpayer. For the year of disposition, the depreciation deduction is prorated according to the applicable convention (usually half-year or mid-quarter).
b. Calculation of Gain or Loss
Upon disposition, the taxpayer must calculate the gain or loss realized. The amount realized (sales price plus any other consideration received) is compared to the adjusted basis (original cost minus all depreciation allowed or allowable, including any Section 179 or bonus depreciation claimed).
c. Depreciation Recapture (Section 1245)
Tractors are considered Section 1245 property (tangible personal property subject to depreciation). When Section 1245 property is disposed of at a gain, the portion of the gain up to the amount of depreciation (including Section 179 and bonus depreciation) previously claimed is recaptured as ordinary income, not capital gain. The recapture amount is the lesser of:- The depreciation (including Section 179 and bonus depreciation) allowed or allowable, or- The gain realized on the disposition.
Any gain in excess of the recapture amount may be treated as Section 1231 gain (potentially taxed at favorable capital gain rates if other Section 1231 gains exceed losses for the year).
d. Reporting
The sale or disposition of a depreciated tractor is reported on Form 4797, and any recapture of depreciation is included as ordinary income.
2. Trade-In of a Tractor
For tax years after 2017, the like-kind exchange rules (Section 1031) apply only to real property, not to personal property such as tractors. Therefore, a trade-in of a tractor for another tractor is treated as a sale of the old tractor and a purchase of the new one.
- The taxpayer recognizes gain or loss on the "sale" of the old tractor (as above).
- The basis of the new tractor is its purchase price (cash paid plus any other consideration), not a carryover basis from the old tractor.
- Depreciation (including Section 179 and bonus depreciation) on the new tractor starts anew, based on its cost.
3. Gifting or Inheritance
- Gift: If a tractor is given as a gift, the donor does not recognize gain or loss, and depreciation stops as of the date of the gift. The recipient's basis is generally the donor's adjusted basis (carryover basis), and the recipient may begin depreciating the tractor if used in a trade or business.
- Inheritance: If a tractor is inherited, the basis is generally stepped up (or down) to the fair market value at the date of death. The heir may begin depreciating the tractor if used in a trade or business.
4. Conversion to Personal Use
If a tractor is converted from business to personal use, depreciation must stop as of the date of conversion. Any subsequent gain on sale is calculated using the lower of the adjusted basis or fair market value at the date of conversion.
5. Section 179 and Bonus Depreciation Recapture
If a tractor for which a Section 179 deduction or bonus depreciation was claimed is disposed of or its business use drops to 50% or less before the end of its recovery period, a portion of the deduction may need to be recaptured as ordinary income.
- The recapture amount is the difference between the Section 179 deduction claimed and the depreciation that would have been allowable if Section 179 had not been claimed, prorated for the period of business use.
6. Depreciation by the New Owner
A new owner (whether by purchase, gift, or inheritance) may begin depreciating the tractor if it is used in a trade or business. The basis for depreciation is:- Purchase: Cost to the new owner.- Gift: Donor's adjusted basis (carryover).- Inheritance: Fair market value at date of death.
7. Recordkeeping
Taxpayers must keep records of:- Date and manner of acquisition and disposition,- Cost or other basis,- Depreciation claimed,- Adjusted basis at disposition,- Amount realized on disposition.
8. Summary Table
In summary: When tractor ownership changes, the original owner must stop claiming depreciation, calculate and report any gain or loss (including recapture of depreciation as ordinary income), and the new owner may begin depreciation based on their basis. Special recapture rules apply for Section 179 and bonus depreciation. Proper recordkeeping is essential to substantiate all calculations and claims.
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