Exchange of depreciated asset

[JoshinNC]

This is a two part question:

Client has 5th wheel camper owned by sole prop. purchased 8/1/04 and took Sec. 179 deduction for full costs ($21,000). Forms S-Corp on 1/1/06, but does not transfer camper into corp. Client purchases piece of land to build a house on (S-Corp is a home builder). Contract is to give camper plus $17,000 to land owner for lot (FMV of camper is $19,000).

Question 1: What is his basis in the lot? I'm thinking it is the lot price - camper fmv?

Question 2: Is the transfer of the camper, which has an adjusted basis of $0 for a share of the property valued at $19,000, a taxable transaction?

Thanks in advance!

[jainen]

be amazed

The basis of the lot is $36,000, since the corp paid 17K plus property worth 19K.

The 2004 S-corp return was false and needs to be amended to delete the Section 179. The taxpayer is making a 19K contribution to the S-corp at this time, which depending on what sort of contribution it is probably means the corp has a basis of 19K and doesn't recognize gain or loss on it's disposition. You'll have to figure out the best way to deal with mileage incurred on behalf of the corp using the TP's vehicle.

If your client goes for this, I would be amazed.

[OldJack]

The basis of the lot could be $17,000. The camper most likely was purchased by the S-corp cash or was contributed to the S-corp at the time of purchase. It is not unreasonable to assume that a camper could be used in the construction business as a office at a construction site. The fact that the title may be in the owners individual name could only be an error or failure to complete the paperwork properly for transfer. Title transfer could have easily been done and still could be were it not given in the deal. Title alone does not prove ownership if the title is false, failed to be transfered, or in error.

As the purchase of the land is not with a relative there is no gain on the sale of the camper as there is no sale price or gain. FMV is ignored for book basis of the camper and the land.

[JoshinNC]

The S-Corp doesn't own the camper

Jainen: There was no S-Corp in 2004. Corp was formed 1/1/2006, converted from sole prop, which "owned" the camper. The sole prop ceased to exist on 12/31/2005 and all assets, less the camper, were contributed to the Corp on 1/1/2006.

Jack: So since the camper is owned by the individual it is as if he "paid" the full $36,000 for the property, $17,00 cash and $19,000 contribution, so the basis is $36,000? I hope I have that right.

Thanks!

[Davc]

Jainen: There was no S-Corp in 2004. Corp was formed 1/1/2006, converted from sole prop, which "owned" the camper. The sole prop ceased to exist on 12/31/2005 and all assets, less the camper, were contributed to the Corp on 1/1/2006.

Jack: So since the camper is owned by the individual it is as if he "paid" the full $36,000 for the property, $17,00 cash and $19,000 contribution, so the basis is $36,000? I hope I have that right.

Thanks!

No. The S-Corp paid 36K for the property. The individual sold a camper to the S-Corp for 19K.

[jainen]

for sure

>>The individual sold a camper to the S-Corp for 19K.<<

...or made a capital contribution or loan... can't say for sure.

Can't say when, either. OldJack makes a good point that failing to transfer title could have just been a clerical mistake when the S-corp was started. In fact, if it were my own client I would probably try to slide it through that way. It would be hard to defend in an audit, though, because he renewed registration and bought insurance and personally signed off on repairs for years. You are going to have to ask some probing questions, and as I suggested in my first post, the client isn't going to like it.

[JoshinNC]

Why wouldn't it be a capital contribution?

He contributed the property to the S-Corp on 12/1/2006, and then the Corp transferred it for the lot.

[jainen]

Sorry, OldJack

>>He contributed the property to the S-Corp on 12/1/2006<<

Sorry, OldJack, I tried to support your theory but now between my two posts I am so far from the actual facts that I'm going to have to drop out of this thread and hope someone else can rescue it while I go back to writing my little stories.

[OldJack]

He contributed the property to the S-Corp on 12/1/2006, and then the Corp transferred it for the lot.

Well.. when he contributed the property to the S-corp, it would have been at the lower of FMV or his COST basis which was zero as he had already written it off with §179. Therefore, when he traded it in plus the cash is "basis" in the new property is the $17,000. Sorry Jainen.

[jainen]

like-kind exchange

>>when he traded it in plus the cash is "basis" in the new property is the $17,000<<

You are describing a like-kind exchange where basis carries over, but that doesn't apply here. He (that is, his S-corp) got 19K value for a zero-basis asset, which is a Section 1245 gain treated the same way as a sale. Actually, it's even more complicated because the S-corp took over the Section 179 deduction too and has to calculate the recapture as ordinary income and adjust the basis accordingly. And take the new property at 36K basis.

[OldJack]

You are describing a like-kind exchange where basis carries over, but that doesn't apply here. He (that is, his S-corp) got 19K value for a zero-basis asset, which is a Section 1245 gain treated the same way as a sale. Actually, it's even more complicated because the S-corp took over the Section 179 deduction too and has to calculate the recapture as ordinary income and adjust the basis accordingly. And take the new property at 36K basis.

You are correct only because the properties are not like-kind properties that are being traded. The camper must be appraised by a qualified appraiser as the 19k value was not a value established by agreement in a contract for purchase as I read the original post. The post say the agreement was "Contract is to give camper plus $17,000 to land owner for lot (FMV of camper is $19,000)".

[JoshinNC]

Matt, I agree with option 2

That was my initial thought, and that's the way I initially explained it to my client. He understands the fact that there is a gain on the disposition, and is prepared for that.

Thanks for confirming my thinking!