Sale of Hobby Property

[tpert]

A client has some woodworking equipment that he used for his cabinet making hobby and he is "retiring" from this hobby due to health reasons. As long as I have known him he has treated this as hobby income. I have two questions. I think I know the answer to the first, but the second has me a bit confused.
1. His depreciation on this equipment has been limited by the hobby loss rules and some years he has had deductible depreciation and other years he has not. In addition, he has had little or no real deduction from the depreciation since it was then subject to the 2% of AGI rules and in most years had significant AGI from his main job. I think I have to reduce the basis of the equipment by the depreciation allowable by the hobby loss rules (as opposed to total depreciation or the amount allowable after the 2% of AGI is applied). Is that correct?
2. When I sell this, am I selling business property or personal property. Business property is property used in a trade or business. I thought that by definition a hobby is not a trade or business and thus, if he has a loss (which he will) it will be a nondeductible loss on Schedule D as opposed to a business loss on Form 4797. However, he is allowed a deduction for depreciation, so that sounds like treatment as business property.

HELP! If I am way of base, please be kind...it is the off season.

Thanks.

[ChEAr$]

Hmm.. a good one!

No matter how income and expenses have had to be reported other income and other on schedule a subject to 2%, the fact that depreciation applied means that it must be taken into account when selling the property, whether at gain or loss.
if it's deemed personal property and sold at a loss, guess what?
But since it is business property, use the form 4797.

[travis bickle]

I would classify it as personal property

A client has some woodworking equipment that he used for his cabinet making hobby and he is "retiring" from this hobby due to health reasons. As long as I have known him he has treated this as hobby income. I have two questions. I think I know the answer to the first, but the second has me a bit confused.
1. His depreciation on this equipment has been limited by the hobby loss rules and some years he has had deductible depreciation and other years he has not. In addition, he has had little or no real deduction from the depreciation since it was then subject to the 2% of AGI rules and in most years had significant AGI from his main job. I think I have to reduce the basis of the equipment by the depreciation allowable by the hobby loss rules (as opposed to total depreciation or the amount allowable after the 2% of AGI is applied). Is that correct?
2. When I sell this, am I selling business property or personal property. Business property is property used in a trade or business. I thought that by definition a hobby is not a trade or business and thus, if he has a loss (which he will) it will be a nondeductible loss on Schedule D as opposed to a business loss on Form 4797. However, he is allowed a deduction for depreciation, so that sounds like treatment as business property.

HELP! If I am way of base, please be kind...it is the off season.

Thanks.

and there would therefore be no loss against other income.

IRS Pub 535, page 5, says:
If you do not carry on your business or invest-.
ment activity to make a profit, you cannot use a.
loss from the activity to offset other income.

So, if you sell some property related to the hobby income, you could have a loss, but it cannot be claimed against non-hobby income; ergo, treat it as the sale of personal property.

Also, from this IRS website, http://www.irs.gov/newsroom/article/...169490,00.html :
Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

- Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
- Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
- Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories. (my emphasis)

So, any business deduction [e.g., loss from sale of property] cannot exceed the amount of hobby income.

Does that help?

[tpert]

So what I am thinking is that the proper treatment of this would be to report the transaction on Form 4797 and then remove it on line 18a (which appears to be the only place I can remove it) before bringing it to page 1, similar to the way I would treat it if it were an employee-owned business asset that was being used. However, unlike an employee's asset, I would bring it to line 23 of Schedule A instead of Line 21 and limit the deduction on that line to the amount of income from the hobby.

This despite the fact that Form 4797 does not seem to provide instructions for this situation.

[appelman]

Maybe not so fast..

Maybe not so fast on handling the depreciation. Take a look at the top of column 2 of p. 6-13 of The Tax Book. I haven't gone back and checked the wording of the Reg, but if TB is correct, depreciation that couldn't be claimed because of the 2% threshold need not be applied to reduce basis.

[Kram BergGold]

Schedule D

I think you treat this like home office.
For each item take sales price less basis plus depreciation claimed (if it was allowed).
If it was not allowed because it created or increased a loss then don't add it back.
If you have a loss, then don't report but if a gain report on Schedule D.

[Gretel]

Maybe not so fast on handling the depreciation. Take a look at the top of column 2 of p. 6-13 of The Tax Book. I haven't gone back and checked the wording of the Reg, but if TB is correct, depreciation that couldn't be claimed because of the 2% threshold need not be applied to reduce basis.

I agree with Appelman. Some years ago I dug a little deeper into the depreciation issue concerning a OIH where some depreciation was not allowed due to income limitations. I don't have the documentation any more but there was a thread on this board.