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Sec. 179 For Leased Motorhome

Posted by taxguru on August 25, 2007

Q-1:

Subject: re: Section 179

I have a question regarding Section 179 that I seem to be struggling with on getting a straight answer (assuming one exists…)

My wife and I are going to purchase a motor home and would like to supplement financing by leasing it to a third party.
The question I have is, would this be applicable to Section 179 (expensing in 07′) if I purchase before the year end and issue it into service (available for rental)?

There seems to a lot of confusion on this particular topic.  I did find a case where the court ruled in favor of the tax payer, Robert D. Shirley, TC Memo 2004-188.
What is your opinion in this matter and has there been any further clarification by the IRS?

Thanks,

 

A-1:

I have discussed this very issue in a number of earlier blog posts.

Here is the applicable quote from the QuickFinder Depreciation Online Handbook:

Leased property. For noncorporate taxpayers, leased property is not eligible for Section 179 expense, unless:

1)    The taxpayer manufactures (or produces) the property to lease to others.

2)    The taxpayer purchases the property to lease to others and both the following tests are met:

  The term of the lease (including options to renew) is less than 50% of the property’s class life.

  For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed 15% of the property’s rental income.

You really need to be working with an experienced professional tax advisor who can help you work out the most appropriate way to handle this, including what business entity makes the most sense for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Thanks for the information.

One follow up question I have as I took your advice on talking to a tax advisor (have appnt. tomorrow).  However she brought up the point that I need to “recapture” any gains I have through the sale of the motor home.  I thought she meant that if I purchase the motor home for 100k and sell it for 80k, I essentially need to claim the 80k as gains on the subsequent filing.  Is this true?

I read (on your blog!) that I only need to claim the difference between the sale and book value…am I reading that right?

 

A-2:

It is always important to keep tabs on the adjusted cost basis (aka book value) of business assets so that you can know what any potential gain or loss would be triggered by its sale.

Basically, the book value is the original cost of the asset less the depreciation (including Sec. 179) claimed up to the point of sale.  In your case, if you expensed the entire cost of the motorhome, its book value is zero, which means the full amount of any sales price will be taxable at the 25% Federal depreciation tax rate, plus state tax if you are in a taxable state.

Your tax pro should also advise you of some other factors to consider. 

Even before a sale, there is a potential taxable partial recapture of the Section 179 if the asset’s business usage slips below 50% in the first five years after you place it into service.

If you are disposing of the motorhome in order to acquire a newer model, there will be no taxable recapture if you trade in your existing one on a new one costing at least as much as the old one is worth and you receive no cash or net relief of debt.

These are all extremely basic tax principles that any competent tax person should have no problem explaining to you.

Good luck.

Kerry Kerstetter

 

 

 

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