Business Auto Coverted to Personal

[KBTS]

Client bought a used van in 2008 for use in his HVAC business. The van cost $18,430 and was over 6k pounds, so not subject to the Section 280F depreciation limits. He used the van 100% for business in 2008 and 2009; then 56.41% business use in 2010. Total depreciation taken through 2010 was $10,396.

In 2011, he used the van 91.94% for business until the end of July. In early August, he had major heart surgery and closed his business for good as he is no longer able to physically perform the work. Since there was no longer need for the van, in October he traded the van in on a car for personal use. He got a trade in allowance of $9,750 but still owed $10,790 on the van.

Since he depreciated using MACRS, I am thinking he will have to recapture some depreciation - correct? How will the 2011 depreciation be calculated - will he only get 1/2 the calculated amount since he stopped using the van for business? Finally, what about the trade in on the car - how will I calculate the tax consequences of that?

Sorry for all the questions, but this is the first I've encountered anything like this.

[Gretel]

I am not anywhere close to my books right now so here are my 2 cents.

Since this was a trade-in for a personal car I would treat the trade-in as a sale of the vehicle. 2011 should be depreciation for half a year and the total gain will probably come from depreciation recapture, also subject to SE tax.

[Roland Slugg]

When MACRS property is converted from business use to personal use, it is treated as a disposition, but there is no gain, loss or depreciation recapture. (Regs §1.168(i)-4(c)) Depreciation for the year of conversion should use the applicable convention, usually the half-year method.