Call Now (800) 681-1295

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

Table of Contents

    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.

    Tax Help Videos

    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

    tax lawyers

    Main Office

    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

    Satellite Offices

    (310) 492-5583
    (760) 338-7035
    (916) 290-6625
    (415) 287-6568
    (909) 991-7557
    (619) 780-2538
    (661) 432-1480
    (818) 935-6098
    (805) 200-4053
    (510) 764-1020
    (408) 643-0573
    (760) 338-7035
    (602) 975-0296
    New Mexico
    (505) 206-5308
    New York
    (332) 224-8515
    (512) 828-6646
    Washington, DC
    (202) 918-9329
    (702) 997-6465
    (786) 999-8406
    (385) 501-5934