Business Vehicle

[S T]

Schedule C t/p has a business vehicle 60% business use, placed in service in 1995. Due to a divorce settlement, ex spouse received this vehicle as part of the property and business settlement, 9/30/05.

How do we treat disposition of vehicle?

Sandy

[Bees Knees]

No treatment necessary. The taxpayer received no money from the disposition, and the depreciable basis has long since been reduced to zero. There is no tax gain or loss, although your client might not see it that way...

[Jan]

Bees, the answer sound to simple, if he had a piece of business machinery that was depreciated to zero, and the court awarded her the machinery from his business. Its seems to me, that he would have a business gain on the value of the machinery. Seems the car would be done the same way. Seems like you can't be taking business property and giving it away for personal use (divorce) and not pay tax on it. Just some of my thoughts.

[S T]

As usual

Thanks Bees for the confirmation.

No in this case my client sees most everything as one "huge" loss due to the divorce and property settlement! I have had a difficult time in relating that there is no tax deduction for monies he has had to pay to ex and go into debt for. Silver lining was that part of the pay out was in an IRA account that was transferred under QDRO, so she will have to pay the taxes on it when distributed.

Sandy

[Gretel]

Bees, the answer sound to simple, if he had a piece of business machinery that was depreciated to zero, and the court awarded her the machinery from his business. Its seems to me, that he would have a business gain on the value of the machinery. Seems the car would be done the same way. Seems like you can't be taking business property and giving it away for personal use (divorce) and not pay tax on it. Just some of my thoughts.

I know, it sounds weird. Some years ago, when I ran into the issue of taking out business property for personal use, I was stunned that it has no tax consequences. If t/p sells property eventually then you have a taxable event. Interesting situation, since t/p will never sell but ex-spouse might. Is this a little loophole or should he keep track of what spouse is doing with car?

I mean, you could gift all your business property to your kids and they sell it and there is no taxable event?

[Bees Knees]

The reason there is no gain or loss in this situation is because it is a transfer incident to a divorce. Section 1041 says no gain or loss is recognized on such transfers….period. Section 1041(b) says the transfer is treated as a gift, so the ex spouse who receives the property gets the basis of the transferor. If the one who receives the property then turns around and sells it, then there would be a taxable gain to recognize by the one who sold the property.

[Jan]

Thanks Gabriele and Bees Knees, I think I understand now, so if the husband gives his rental property to his ex. He reports the rental income up until the divorce and then his ex-spouse reports the rental income for the remainder of the year.