Caution!Depreciable Property
Depreciable property is trade or business property having a useful life of more than one year. Such property typically wears out, becomes obsolete, or loses its value due to natural
Property having a life of less than one year is usually expenses, not depreciated.
Depreciable property includes real property, personal property, patents and copyrights used ina trade or business or held for the production of income. Inventory, stock in trade, property held as an invetment for personal purposes is not depreciable property.
Caution!
If you sold depreciable property that you used in a trade or business or in an income-producing activity, you MUST report the sale so the gain or loss is reported in the proper place in the tad return.
If you trade the property for the same type and use of property, any "gain" is deferred by "rolling-over" the gain into the basis of the new property.
If the property is "sold" for less than the current tax basis, then the loss is a deductible loss for business property. For personal use property no loss is allowed.
Reducing all costs is a concern for business and personal transactions. Increasing the cash in-flow is also a concern for both business and personal transactions.
Sly Planning ...
What really matters is the mazimizing of cash available to you, without incurring debt. Therefore the shrewd planner will structure the transaction so that s/he finalizes the "deal" with the most cash left-over.
Here are some examples:
 | Where a trade is the shrewd move (Under all examples, the transaction is limited to business transactions. Furthermore the shrewd person must always realize the seller will quote you one price when there is a trade-in and a different price when there is no trade-in. This allows the seller to quote you a higher price for your old equipment and still maintain the profit margin the seller needs/wants.): The equipment is fully depreciated. The sales price is $1,000 and the trade-in price is $1,000. The marginal tax rate is 28%. If the equipment is sold the gain is $1,000. The tax is $280. After tax cash to purchase new equipment is 1,000 less 280 = 720. If the equipment is traded (and you know the selling price is the "true" cash price) then the full $1,000 is available to you for purchasing new equipment. | |||||||||||||||||||||
| Where the sale is the shrewd move. The equipment is NOT fully depreciated. The equipment cost you $1,000 and has a tax basis of $800. The equipment has been heavilly used and is woth only $100. The $100 is the price you will receive from either a trade or if you sell it yourself to some party other than the source of the new equpiment. If the equipment is sold the loss is $700 ($800 basis less the $100 in cash you will receive). You will have a tax reduction of 28% x $700 = $196. In this transaction:
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The amount of the tax reduction will not be an immediate cash in-flow. The reduction will reailzed by paying less tax on either you quarterly estimated tax or by paying less at the end of your tax year.
First Year Bonus!
QUALIFYING PROPERTY. Property qualifying for the section 179 deduction is depreciable property, used in a trade or business, and includes:
| Tangible personal property, | ||||||
| Other tangible property (except most buildings and their structural
components) used as:
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| Single purpose agricultural (livestock) or horticultural structures, and | ||||||
| Storage facilities (except buildings and structural components) used in connection with distributing petroleum or any primary product of petroleum. |
If you purchase an asset with cash and a trade-in, part of the basis of the asset you buy is the basis of the trade-in. You cannot claim the section 179 deduction on the basis of the trade-in.
