Tony receives an automobile from his uncle, Ned, as a graduation gift. Ned used the vehicle only for commuting to his office during the 3 years he owned it. Ned paid $20,000 for the vehicle. It is valued at $8,000 on the date of the gift. Tony will use the automobile 100 percent of the time for his business. Determine Tony's basis in the automobile for depreciation purposes. Explain your answer in terms of the concepts of taxation.

Question

What will be an ideal response?

Answer 1

Since the fair market value is less than the adjusted basis, the split basis rules apply. The basis for depreciation is the lesser of the FMV or the adjusted basis to the donor. Tony's basis for depreciation is $8,000. The basis cannot be $20,000. That amount would allow a deduction of $12,000 ($20,000 ? $8,000) in depreciation for the decline in value due to Ned's personal use of the vehicle. Personal use deductions and losses are not allowed. Although $8,000 is the depreciable basis in the automobile, the amount of basis used to determine gain or loss on disposition of the automobile cannot be determined until the date of disposition using the split basis rules.