Gifting of machinery

[Marie]

Father and son were farming.  Previous preparer depreciated machinery as if the father owned, but it was actually the son's.  Now son has sold the machinery.  Father is gifting farm machinery to son.  Basis is very low as most has been almost depreciated out on father's return.  Son receives father's basis as his basis.  Son has not depreciated gifted machinery.   If son held for more than 2 years, could he sell the machinery as capital gain income?  Does son receive his father's long term basis, maybe? 

[Lion EA]

Won't it be 4797 if they were farming with the machinery?

If machinery had been depreciated on son's return, it would've had a low basis at time of sale. So, it should have a low basis. Father's basis and holding period passes to son if a gift.

[Gail in Virginia]

And if is passed as a gift, even though it might be long term, the part of the gain that is recapture of depreciation is ordinary income. And it sounds like that will be almost all of it. 

[Marie]

yes, that's how I thought, just looking for something else to help the son out.  It was just a mistake on the previous tax preparer, but nothing to do about it now, I guess.  thanks

[DANRVAN]

18 hours ago, Marie said:

.  Now son has sold the machinery.  Father is gifting farm machinery to son. 

But wait, wasn't it his to begin with? 

If I am following this correctly,  how can  son receive a gift of property he already owns?

How can dad establish a basis in property he never owned?

On son's side of this,  I believe a 3115 is in order.

[Lion EA]

Did son pay for equipment when purchased? (Cash, loan, credit card, anything) Does he have receipt? Did he deduct that payment when paid? Did your client(s) ask prior preparer why equipment is on father's return?

[Marie]

previous preparer is not in office currently because of the virus.  I think father is going to help son pay the tax bill.  It would days of work to figure out and I didn't make the mistake