Short year depreciation

[Gretel]

Partnerships starts in 03/05 and ends in 11/05. Assets are then transferred to remaining partner. Partner who got out of the business sold his share to remaining partner.

Since the assets are not disposed off, merely transferred I assume partnership is eligible for depreciation?

[John of PA]

Not ignoring you

Gabrielle,
We are not ignoring you, this is a tough (and very good) question. If I come across something on this, I'll let you know.

[jainen]

From the partnership's point of view

From the partnership's point of view, the assets were taken out of service in the same year they were placed in service, therefore depreciation is not allowed.

[skhyatt]

Agree

TTB 9-17, "Property placed in service and disposed of in the same tax year". Is nonqualifying property for depreciation.

[Gretel]

Thanks, folks. Somehow I thought if assets can be transferred out of a business (Sch. C and partnerships) with no tax consequences something similar could apply to depreciation and just the basis then is reduced in partner's hand who now is Sch.C.

Of course you are right: disposal is disposal and gain/loss on disposal a different animal than depreciation.

[Roland Slugg]

Not so fast

Of course you are right: disposal is disposal and gain/loss on disposal a different animal than depreciation.

O'contraire. What you described is not a disposition under the meaning of Regs 1.168(d)-1(b) ... at least not for the remaining partner.

Since the transfer is non-taxable under Code §731, the transfer of the assets to the remaining partner upon dissolution of the p'ship is not a "disposition." (See Code §168(i)(7)(B)) Therefore, depreciation is allowable to both the p'ship and the surviving partner, and must be allocated between them.

For assistance is figuring how to calculate depreciation for 2005, for both the partnership and the surviving partner/sole proprietor, please see Regs §1.168(d)-1(b)(3), §1.168(d)-1(b)(6), §1.168(d)-1(b)(7), and the example following (b)(7)(iv). This is not easy reading, but I've seen worse.

Here's what I would do: For F-1065, figure the partnership's share of the year's allocated depreciation based only on the surviving partner's basis in those assets. Allocate all of this depreciation to that partner ... none to the partner who was bought out. For F-1040, allocate the remainder of the above depreciation to the now sole proprietor, along with depreciation on the other portion of the same assets he acquired from the selling partner. The mid-Q convention will probably apply to that portion, at least I believe it should.

When all is said and done, the total depreciation deducted by the remaining partner ... the total of that flowing to him via Schedule K-1 as well as what he deducts on his own Schedule C ... should be a half-year's depreciation on his proportionate share of the property acquired by the partnership, plus a mid-Q allowance on the property he purchased from the selling partner.

[Gretel]

Roland, thank you so much. This makes a lot of sense (not to say that tax law should make sense). Of course no electronic filing for this return since my software will slap me left and right with errors I must fix before transmitting.