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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?
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 percent 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 percent. 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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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.