(Part 10 is continuation of series, links to all parts are provided at end of this blog post. This valuable series on Dividing Property In Divorce Tax Traps has been updated for the Tax Cuts And Jobs Act (TCJA) and the Cares Act. This series is provided by David Ellis of Ellis & Ellis CPAs in Pasadena, CA.)
Miscellaneous Issues
Recapture of Depreciation
In general, there is no recapture of depreciation on Section 1041 transfers.
1.Transfers between spouses are treated as gifts.[1]
a) Property transferred by gift does not require recapture at the time of the gift.[2]
(b)Recipient spouse is responsible for recapture, if and when property is sold at a gain.
Example:
Fred and Ethel are divorcing. They own a retail frozen yogurt shop as community property. As part of the global property settlement the business and related equipment is divided. There are three (3) machines used for making the frozen yogurt—each one has an original purchase price of $2,500. Each machine has been fully depreciated using MARCS 5-year straight line. Several years after the divorce is final, Ethel sells each machine at a local flea market for $500. Ethel will recognize $1,500 in Section 12 45 recapture, calculated as follows:
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