mr. taxman...time

Just like a lawyer or a doctor or any other professional, you probably should consult several so that you can have a bit of confidence that when their opinions overlap, you're probably nearing the truth. A certification means that met they demonstrated the minimum knowledge to get through the test, not that they can adequately apply the knowledge. Just like a high SAT doesn't necessarily correlate with high college grades. Now there's a higher liklihood that smart kids score high and go on to do well in college, but it is certainly not 100%. Be careful in taking just one CPA opinion. Judge if the money at risk isn't worth a couple of "second opinions.

Enron had a lot of CPA's.

If you sell a tractor that you have taken depreciation on (Section 179 or regular depreciation), the amount of depreciation taken must be recaptured. Say you buy a tractor for 1000 & take Section 179 for the full amount. Later on in terms of days or years, say you sell the tractor for $1200. You have to report the $200 capital gain and recapture (as ordinary gain) the $1000 -- so you will add $1200 to your taxable income.

The act of taking depreciation ahead of its time is what got so many farmers in trouble with the IRS back in the 70's & early 80's. High costs of financing forced many to liquidate to pay the banks for the equipment they bought but that was mortgaged to the hilt. The sale proceeds may or may not have brought enough to pay off the bankers -- the first issue, but then there was a mountain of depreciation they were forced to recapture -- lots more "paper" income to report and pay taxes on. IRS liens forced many into bankruptcy! Tragic indeed -- but ignorance of tax rules can put your family finances in harm's way in a hurry.

And yes, it is true that it is the sale of the asset that triggers reporting of both capital gain (or loss) and depreciation recapture. So if you never sell, you have technically sheltered the amount of your investment from being taxed for the present time. It does present some interesting issues for your heirs will deal with such assets once you pass on leaving behind fully depreciated assets. (PatB)

• Restoration Site, JD-H

I mean, if you have a $100 asset that you depreciate down to 0, deducting it in portions to counteract income, that's one thing. That's a deduction against your income because the IRS says the item you used to help generate that income is wearing out and will someday need to be replaced when it is unusable and worthless, like a shovel or a chainsaw. That's the income tax portion of the tax code.

Once you die, your heir(s) get the asset, and say it is now worth $200. They pay an inheritance tax fee on the appraised value of the asset they received (whether they choose to re-sell it or not), whether you have depreciated it fully, partially, or never at all. Your personal auto is good example, an item which typically is not depreciated. Your heirs gain it from your estate, and it is valued at the current appraisal LESS ANY MONEY OWED in case you still have a loan against it. That's the new basis for the transferred capital, Asset value less any liability, not the remaining balance of any depreciation or not. Depreciation has nothing to do with the value that the heir or estate pays inheritance taxes on. So if you left your newer John Deere tractor in the estate, fully owned with no encumbrance, and it was half depreciated, it would still be valued in the estate at its current appraised value, whether you had depreciated any of it during your use of it against your personal income taxes or not. If it's worth $50,000 in the market, that's the value that it will contribute to your estate's value. That's why it is called an inheritance tax and not an income tax. Two different codes, right?

Your income stops when you die, and at that moment, so does the periodic deduction of depreciation against it.

Now to the tractor buyer, what's best for you is hard to say based on the limited information, but one thing is for sure. You can depreciate something over time because it is expected that it will have been worn out to worthlessness over that time. That's what depreciation is. How you choose to calculate that deduction whether it is 10 years straight, or Section 179, or BR549, is up to you and how and if you qualify for depreciation under the tax code. Now, if it the asset happens to appreciate over in time instead of truly depreciating, you are going to have to pay for its true value either when you sell it, or when you die and your heirs sell it, though it will be a different time and at different tax rates.

I think maybe the simplest way to visualize this is that you only get to depreciate the amount that you write the total check(s) for. So if you depreciate a new 4020 from $10,000 to nothing, then you trade in the 4020 on a new 4440 at $30,000, and they give you $8000 trade-in credit, then you only get new depreciation of $22,000 from the 4440, because that's what you wrote the check for, right? The 4020 really only cost $2000 out of pocket. Total outlay, $10,000 + $30,000 = $40,000, less return from resale, $8,000, for a total outlay of $32,000, which equals the total reported depreciation $22,000 + 10,000 = $32,000. When you eventually depreciate the 4440 to nothing, then anything you get for it by selling it will be taxable.

I just don't see that the amount of depreciation, if any, will cause any interesting issues for your heirs.

Are you SURE of that? 179 or not, she'll pay recapture on HER half of the asset if she sells it, because she is still alive. Your half she inherits at market value, whether it is depreciated fully, any, or none. She can opt for the the one-time spousal exclusion for her inheriting YOUR half so as to avoid inheritnace taxes. YOUR estate did not have to recapture the depreciation on your half, it just had to pay, or have the heirs pay from the estate, the inheritance taxes on the value of your estate. To force recapture of depreciation, you gotta be alive.

It is incorrect to mix income tax depreciation with inheritance asset value. Flip it over and say you bought a stock for $10, and when you die it is worth $25. Your heirs pay tax on the full value of $25. If you sold it while you were living, you pay on the $15 gain because you already paid taxes on the money that originally bought it. The heirs paid based on total asset value in the estate ($25), and you pay capital gains over and above the original cost basis ($15).

You can't mix income and inheritance taxes. Well, you can, but it is not correct.

I would say to those asking tax questions on this forum -- consider the value of the words of wisdom found here to be worth about what you are paying for it! (PatB)

He said he supposed that if you wanted to use the term "recaptured" to mean that an item returns to market worth again when you come to sell it only to pay taxes at the sales price, then he said that is recapturing, but that is not an appropriate term to use with respect to estate taxes.

He said imagine that you had one asset, worth $20,000, and you depreciated it 100% on the spot, you filed your taxes at midnight:01, on January 1st, then you keeled over dead. You have no income for the new year because you are dead, your last year return has been filed, and now your estate tax man comes and says, "The estate has one asset and it is really worth $100,000". Your estate is worth $100,000, and that is what your estate must pay on. Ain't no recapture to say it is really worth $20,000. Period.

So again, I say that depreciated assets moving into an estate are "recaptured" in value, to use a term inappropriately, but not to what you paid for them, but to the market or appraised value, on which the taxes on your estate would be based.

I just offer this for what it is worth, but I REALLY trust this guy.