Listed Property Conversion

[Stringbean]

This is one of those "when is it effective" questions. The simplest way to answer is to illustrate with an example:

Item in question is a Motor Home furnished with art supplies, equipment, and paintings for sale. Artist takes motor home on the road to regional art shows. Artist also uses to take family on personal vacations.

Motor Home is clearly "listed" property. Over the years, the motor home is used less and less for art shows.

Year------------Total Mileage---------Business Mileage-----------Business %

2011------------------8,000-------------------6,000-----------------------75%
2012------------------8,000-------------------5,000-----------------------63%
2013------------------6,000-------------------2,400-----------------------40%
2014------------------8,000-------------------1,000-----------------------12%

However, let us calculate the CUMULATIVE percentage over the years:

2011------------------8,000-------------------6,000-----------------------75%
2012-----------------16,000-----------------11,000-----------------------69%
2013-----------------22,000-----------------13,400-----------------------61%
2014-----------------30,000-----------------14,400-----------------------48%

QUESTION: In which year does the listed property fall below 50% for reporting purposes?
a. 2013 because the usage for that year was less than 50%, or
b. 2014 because the cumulative usage was greater than 50% until that year

[JohnH]

Publication 587 seems to say that each year stands on its own. But your averaging approach is novel. It might work if business usage oscillates from year-to-year and there are one or two years of under-50%.

But if business usage is declining and not reasonably expected to go over 50%, I suspect the year it drops under 50% is the end of the line. It will be interesting to hear what others have to say about this.

================================
Years following the year placed in service.
If, in a year after you place an item of listed property in service, you fail to meet the more-than-50%-use test for that item of property, you may be required to do the following.

Figure depreciation, beginning with the year you no longer use the property more than 50% for business, using the straight line method.

Figure any excess depreciation (include any section 179 deduction on the property in figuring excess depreciation) and add it to:

Your gross income, and

The adjusted basis of your property.

[TaxGuyBill]

I agree with John. It's "a".


"If any listed property is not predominantly used in a qualified business use for any taxable year"

https://www.law.cornell.edu/uscode/text/26/280F#b

[Roland Slugg]

The answer is "a" ... the first year in which business use dropped below 50%. This is covered by Regs §1.280F-3T(c)(2). That Reg refers to "the first taxable year in which the property is not predominantly used in a qualified business use." (Emphasis added.) The Regs say nothing about the cumulative percentage of business use.

Although you didn't specifically ask for additional information, I would like to offer some:

That Reg goes on to say that any excess depreciation must be included in the taxpayer's gross income and added to the property's adjusted basis for the first taxable year in which the property is not predominantly used in a qualified business use. This means that in a year when business use is less than 50%, depreciation must be recalculated retroactive to the year the property was first placed in service, and the excess depreciation taken must be included in the T/P's return for that year. (It's reported on F-4797.) The recaptured depreciation includes any §179 deduction taken in the first year. Furthermore, the recalculated depreciation must be straight-line using the ADS life, and that continues for the remaining time the asset is in use. The ADS life for an RV is probably 12 years, although some might suggest that it's only 5 years, treating the RV like a pickup or light-duty truck. On the other hand an RV may be classified as a second home, and if so, its depreciable life is much longer, and there is the 14-days-of-personal-use rule to take into consideration, too.

[Stringbean]

Thanks to All

Thanks to all respondents, all of them relevant and helpful.

Messy. One good reason why I practically insist on the mileage method where this won't have to be dealt with. The Motor Home was so expensive, gas hog, and expensive to operate, it just couldn't operate for the allowable mileage method.

Not to escape this element of the discussion is the guy who drives up in a $60,000 brand new truck. Insists that it is ALL for business (even though it has plush back seats). Wants the government to pay for this truck. Drops his teeth when you ask him for a mileage log.