making business assets personal use

[snowshoe]

Is my office the only one that gets the BS problems?? Surely not- but, I'm feeling that lately.

New client shows up, their tax pro has retired (good thing!!!). They have good income & MASSIVE write offs for a business/businesses. The business has 'changed'. As I began working on it, it appeared to be a whole lot of BS. The prior tax pro was deducting HUGE amounts of things with zero income for the business. As I looked over the list of 'expenses', it was clearly personal recreation expenditures. As I interviewed my client again- they had PLANNED to open a business at some point, but were not operating the business at this time. I sent an email saying no-can-do, doesn't seem legit & good luck! They called me back & said yah, it made sense & the other tax pro hadn't told them that & they'd do whatever I thought was right to get on track & avoid additional risk. They do have one property (airplane hangar) with a paying renter. So, that business I can get on board with. Rec cabin, atvs, boats, renos, etc- not so much!

Anyhow, the plan to to 'dispose' of the prior business & all depreciated assets & start over with the legit business. Is this proper? And do I 'dispose' of the depreciated property on the depreciation schedule with zero dollars as sale price? This is what I have done. I chose 1/1/23 as disposition date, so that there was no depr for 2023 calculated. I feel like their prior tax pro let them get away with some major write offs, but I don't know what to do about that & I guess they can sweat that one out. They say that they still plan to operate their tourism business, but they aren't there yet (working full time & investing in the places).

Ideas appreciated!

Oh, shoot- also- we have alot of shops, garages, hangars that are rented & also have res rental units upstairs- would you depr this as res prop?

[terryats]

on your last question. If 80% or more of the gross rental income of the property is derived from residential dwelling units, then the property as a whole is depreciated under the 27.5-year residential rules. If less than 80% of the income is residential, the property is classified as non-residential and depreciated over 39 years.

[Rapid Robert]

"And do I 'dispose' of the depreciated property on the depreciation schedule with zero dollars as sale price?"

What? This makes no sense. Why would an asset with a non-zero adjusted basis suddenly generate a deductible business loss just because it is converted to personal use? You would only do this if the asset was being junked (abandoned). There are special rules for listed property dropping below a certain percent of business use, and other types of accelerated depreciation, but in general I think you would "dispose" of the assets (convert to personal use) by showing a sale price equal to the adjusted basis, for zero gain/loss.

TheTaxBook has a section about Business-use to personal-use conversion. They explain how to calculate depreciation for the final partial year.

Upon the conversion to personal use, no gain, loss, or depreciation re-
capture under section 1245 or section 1250 is recognized. However,
the provisions of section 1245 or section 1250 apply to any dispo-
sition of the converted property by the taxpayer at a later date

[snowshoe]

Thank you! I could not find that section as I was looking for it. I agree about not generating a loss!

[DoubleO]

I don’t think it is just you. I’ve had several prospective clients announce they had formed LLCs to take their deductions. One’s expenses looked like toys to me. After we had the profit motive talk, we did not engage. I also haven’t engaged with the others. I think there must be some Toktok video out there.