What 2 categories do property include?
Property includes both realty (real property) and personalty (personal property)
--Realty generally includes land and buildings permanently affixed to the land
--Personalty is defined as any asset that is not realty
*Personalty includes furniture, machinery, equipment, and many other types of assets
Is personalty (personal) person the same as personal use property?
No. Personal use property is any property (realty or personalty) that is held for personal use rather than for use in a trade or business or an income-producing activity.
*Write-offs are not allowed for personal use assets
How does the cost recovery affect the basis in an asset?
Basis in an asset is reduced by the amount of cost recovery that is ALLOWED and by not less than the ALLOWABLE amount
What is the difference between allowable cost recovery and allowed cost recovery?
Allowed cost recovery is cost recovery actually taken. Allowable cost recovery is amount that could have been taken under the applicable cost recovery method.
What happens to the basis if no cost recovery is claimed on the property?
If no cost recovery is claimed on property, the basis of the property must still be reduced by the amount that should have been deducted, or the allowable cost recovery.
What happens to the cost recovery basis for personal use assets converted to business or income-producing use?
Basis for cost recovery and for loss is lower of adjusted basis or fair market value at time property was converted.
How are losses recognized for conversions of personal use asset to business use?
As a result of this lower-of-basis rule, losses that occurred prior to conversion can not be recognized for tax purposes through cost recovery.
What does MACRS apply to?
MACRS applies to:
-Assets used in a trade or business or for the production of income
-Assets subject to wear and tear, obsolescence, etc.
-Assets that have a determinable useful life or decline in value on a predictable basis
-Assets that are tangible personalty or realty
The half-year convention is a cost recovery convention that assumes all property is placed in service at mid-year and thus provides for a half-year's cost recovery for that year.
Generally rule for personalty.
Additional First-Year Depreciation
-Allows an additional 50% cost recovery in year asset is placed in service
-Qualified property includes most types of new property other than buildings
-Property that is used but new to the taxpayer does not qualify
-Applies when more than 40% of personalty is placed in service during last quarter of year
-Assets treated as if placed into service (or disposed of) in the middle of the quarter in which they were actually placed in service (or disposed of)
*There can be substantial limits on cost recovery of assets considered listed property
*Listed property includes the following:
-Other property used as a means of transportation
-Property used for entertainment, recreation, or amusement
-Computer or peripheral equipment
any four-wheeled vehicle manufactured for use on public streets, roads, and highways with an unloaded gross vehicle weight rating of 6000 pounds or less.
What are the passenger automobile limits?
*Limits are for 100% business use
-Must reduce limits by percentage of personal use
*Limit in the first year includes any amount the taxpayer elects to expense under § 179