Q:

Kerry,
Thank you for your answers. One more question.  Once equipment is purchased and the Section 179 full deduction is taken, is their ever a point in time where the owner could sell the equipment, not have to recapture the amount depreciated and pay taxes on the transaction?  I was told that if I took the deduction and held the equipment for five years, I could avoid the recapture tax, even though I sell the equipment five years later for the value I paid for it.

A:

You were either given incorrect information or are interpreting it improperly.

There is a potential recapture on Section 179 property if its business use percentage falls below 50% before the end of its normal MACRS recovery period (i.e. 5 or 7 years). 

However, if an asset’s cost has been deducted on your tax return through Section 179 and/or regular depreciation, and fully depreciated, its cost basis on your books is zero.  If you ever sell that item before you die, anything you get for it will be taxable income.  Whatever you receive for it, up to its original cost, will be recapture of Sec. 179 and depreciation and subject to its 25% Federal income tax rate, plus any applicable State tax.

If you give a fully depreciated item to someone else, your cost basis carries over to that person.  If s/he sells it, anything received will be taxable income and taxed as depreciation recapture.

As I mentioned in my earlier response, the only way to not have taxable income on the item’s sale is if you leave it to your heirs as part of your estate.  Even though it had been fully depreciated on your personal books, its cost basis is stepped up to its fair market value.  If your heirs sell it for that amount or less, it will be tax free to them.

I hope this clears this matter up for you.  As always, it is crucial that you work with a professional tax advisor when considering real life transactions such as these.

Kerry Kerstetter