IRC Reg. § 1.1041-1T(d) and Q& A-13, dictate potential surprising hidden negative tax consequences where a property has been previously depreciated under IRC § 179 and is subsequently converted to personal use following a § 1041 transfer. The transferee spouse, and her tax counsel, need to be aware that § 179(d)(10) and Reg. § 1.179-1(e), require the recapture of previous § 179 deductions where a business asset has previously been expensed under  § 179 is subsequently converted to personal use.

To illustrate, consider a scenario where H owns a business that utilized a Van for deliveries to customers for which he took a large § 179 bonus depreciation deduction on.  H transfers the car to W, under a property settlement agreement.  After removing all of the company graphics, W uses the Van for strictly personal purposes. Under 1041, H is not required to recognize gain, loss, or depreciation recapture on the transfer. To the horror of the transferee spouse, W is required to recapture the entire (or merely a portion) of the § 179 deduction previously taken by H, based on the period of time in which H utilized the Van in his business. The recaptured § 179 deduction will be ordinary income that will increase W’s basis in the Van, and help offset potential future capital gains if W subsequently sells the Van.

In order to avoid this absurd tax result, the Van should be sold and the proceeds transferred to W instead.

October 3, 2016

What Tax Consequences will I Face When My Property Was Previously Depreciated and then Transferred Incident to a Divorce?

IRC Reg. § 1.1041-1T(d) and Q& A-13, dictate potential surprising hidden negative tax consequences where a property has been previously depreciated under IRC § 179 and […]
March 21, 2013

What is tangible personal property?

“Tangible personal property” means personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner knowable to the senses. […]