Tax Guru – Ker$tetter Letter

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Archive for January 5th, 2008

Depreciating converted property

Posted by taxguru on January 5, 2008

Q:

Subject: Depreciation Question

Hi Guru, Have been reading you for a long time but never have seen a question like this.  From 1999 to 2006, I ran a B&B and depreciated the business portion of my property as a commercial business.  On Jan 1, 2007, I converted this property to a single family rental.  Do I use the residential depreciation schedule this year?  Also, would I continue to use the old basis or create a new basis when the property was converted.  The property has appreciated almost double in value from 1999 to 2006.

 

Thanks for your advice and hopefully this might be helpful to some other loyal readers

Thanks

 

A:

If you have been reading my stuff for any length of time, you should know that you need to be working directly with a professional tax advisor to ensure that you do things properly.

This is a perfect example of a very common way in which people accidentally commit tax fraud; by setting up assets converted from personal to business use at a much higher cost basis than is appropriate.  The tax law is very specific in the fact that converted assets are to be set up at the lower of their original cost or their current fair market value as of the date of conversion.  Under no circumstances could you increase the depreciable value above what your actual cost was.  To do so would essentially be giving you tax deductions on values to which you are not entitled.

That is the case for assets converted from purely personal usage to a new business usage.  In your case, you were already using the property in a business, so you have no justification whatsoever for modifying the cost basis for depreciation purposes in its new use.  You need to keep track of the original cost, along with the deprecation you had already claimed. 

If you were depreciating the structure over the 39 years required for nonresidential real estate, you can change the appropriate life to the 27.5 years used for residential rental property as of the date of the new use.  Again, you should have an experienced professional tax preparer do those calculations for you.

I hope this isn’t too confusing and properly stresses how dangerous it is for you to continue to try to negotiate the  treacherous tax waters on your own.

Good luck.

Kerry Kerstetter


Follow-Up:

Thanks!! I appreciate your swift reply

 

 

Posted in Rentals | Comments Off on Depreciating converted property

Section 179 Inflation Adjustments

Posted by taxguru on January 5, 2008

Q:

Subject: Section 179

Hello Kerry,

Thank you for your informative insight onto this project.

I do have one question for you.  Just as the limit has been adjusted for inflation as it has increased from $100,000 to $128,000, the phase out of Section 179 has been adjusted by the same percentage.  So it would seem to me that the phase out should have increased by 28% above the original $400,000.  If that is correct, the phase out should occur after $512,000 and not $510,000.  Would that not be correct?

Thanks,

A:

The Section 179 did not jump 28% at any one time.  It took several years to reach the current level of $128,000 in annual increases, plus a new law that was passed last year that increased the base before COLAs from $100,000 to $125,000.  There was never a COLA of 28% because that calculation is based on the annual inflation rate, which hasn’t been anywhere close to 28% since the days of Jimmy Carter.

You can see the recent historical and projected future Section 179 limits on my website.  
 
At the bottom of the page, check out the historical phase-out points.

As with almost all of the annual inflation adjustments in the tax code, they are rounded to the nearest $1,000 for the Section 179 expensing limit, and the nearest $10,000 for the beginning of the phase-out.  This is why, when looked at over a five year period, as you are doing here, the cumulative percentage adjustments can be slightly different.

I hope this helps you better understand how the maximum Section 179 grew a cumulative 28% from $100,000 in 2003 to the $128,000 we have now in 2008, while the phase-out threshold only grew 27.5% over that same time period.  It was the annual rounding.

Kerry Kerstetter

 
Follow-Up:

Hi Kerry,

 

I realize that the changes have occurred over a number of years, but I was unaware that the phase-out is rounded to the nearest $10,000.  That would explain why the limit is now $510,000 and not $512,000.  

 

Thanks for the clarification.

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179 | Comments Off on Section 179 Inflation Adjustments

Arkansas Section 179 Limits

Posted by taxguru on January 5, 2008

Our State rulers in Little Rock made an attempt to conform to the much higher available Federal allowance for Section 179 expensing.  They seemed to have accomplished that for a few months, until our DC Rulers increased the maximum in the middle of 2007.  This means we now have another difference between the IRS and DFA levels.  However, the difference is now much smaller than it had been in past years.

This is from the most recent DFA newsletter:

SECTION 179
Increase

Act 613 of 2007 adopted IRC Section 179 as in effect on January 1, 2007. At that time the maximum amount to be claimed was $112,000. This amount will be adjusted for inflation for the year 2008. In May 2007, Congress enacted an increase to $125,000. Arkansas has not adopted this increase.

For all purchases that qualify for Section 179 that were made after January 1, 2007, the maximum amount to be deducted for a calendar year tax return or any fiscal year tax return is $112,000, regardless of the fiscal year’s beginning date.

The investment limitation that was adopted is $450,000 and the maximum limitation is reduced dollar for dollar by the cost of qualified property placed in service during the tax year over the investment limitation. This will be adjusted for inflation for the year 2008. The code section 179 deduction is reduced to zero when the investment limitation reaches $562,000 (450,000 + 112,000).

Part of Section 179 dealing with the expensing cap on sport utility vehicles limitation of $25,000 was also adopted in this Act.

 

Business Plan Pro

 

Posted in 179 | Comments Off on Arkansas Section 179 Limits

Sounds bad…

Posted by taxguru on January 5, 2008

Posted in comix, IRS | Comments Off on Sounds bad…