Depreciation on business asset

[LMathey]

I have a client that rents a furnished condo to others. They had $31,087 of furniture. Each year we compute the rental days vs the personal days and take that percentage as business use. Since these assets are now beyond their recovery period but still in use shouldn't we be able to continue to compute some type of depreciation? Due to less rental days in the first few years we have only taken $20,686 of depreciation. During 2007 the business use was 85%.

Am I missing something or do we just continue to use the assets but not recover any more of the cost?

Thanks in advance for any insight.

[Roland Slugg]

Depreciation stops

When mixed use property reaches the end of its depreciation period, depreciation stops. If it didn't, the non-deductible/personal use portion in all the prior years would eventually become deductible.

[LMathey]

What about disposal of the asset?

I understand what you are saying but if the use increased to 100% business why shouldn't they be able to continue to depreciate the undepreciated portion since the asset is continuing to be used for a business purpose.

A second question, if in the final year the business percentage is 85% on a $10,000 asset but prior years were 75-80% how do you determine whether there is a loss on disposal? Tax software would say the recovery basis is $8,500 based on the final year business percentage but depreciation taken would be less than that. Do I have to override the cost basis to make it equal to depreciation taken during the depreciation period?

Thanks again for any assistance.

Can you give me a cite?

[Roland Slugg]

Regarding your first question, the personal portion can be viewed as depreciation "calculated but not deducted." Thus, the assets are, in fact, fully depreciated at the end of their MACRS class lives, but only the business/rental portion of that depreciation was deductible each year.

Regarding your second question, I've faced that same situation several times myself and have looked for rules about it and found none. What I do in such cases is figure the overall ratio of business use to personal use based on depreciation ... allowed versus allowed plus disallowed (i.e. personal) ... then apply that ratio to the selling price of the property to come up with the amount that represents the selling price for the business portion. This may or may not be perfect, but I believe it produces a fair and reasonable solution most of the time.