Published October 23, 2012
Dear Tax Talk, If I sell my tractor that was depreciated out years ago, do I have to pay taxes on the sale of it? What are the depreciation rules? -- Arlene
Dear Arlene, Well, yes, you do. That's what we call depreciation recapture. While the depreciation rules have become quite generous lately for small businesses, the concept of recognizing gain on the sale remains the same. When it comes to personal property as opposed to real property, the depreciation recapture rules aren't that favorable. Real estate depreciation recapture is termed section 1250 recapture and carries a maximum 25% tax rate. Personal property depreciation recapture has no maximum tax rate; it is taxed at the same rate as your other ordinary income, which could be as high as 35%. Personal property depreciation recapture is termed section 1245 recapture.
If you bought the tractor for $10,000 and you've claimed the full $10,000 in depreciation over the years, your basis for gain or loss is zero. If you sell it outright for $1,000 you'll have $1,000 in section 1245 depreciation recapture. On IRS Form 4797, you would complete lines 19 through 25 to reflect the sale of the tractor at a gain.
Remember, if you trade in the tractor, you eliminate recapture. The trade-in would be considered a like-kind exchange and you can defer the gain by reducing the basis of the replacement equipment.
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