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Greetings everyone. Have a tax question. Back in 2011 I bought a new piano and depreciated it using the rule 179, took off $10,000 and depreciated the rest over a 7 year period using the MACRS formula. I am a professional musician and let's just say the i paid $40,000 for it so I wrote off 10 K the first year and depreciated the remaining $30,000 over a period of 7 years. I am thinking about selling it and let's assume I will get $35,000. I am looking at a fairly big tax penalty because even though I did not make a profit I was able to sell it for substantial amount and I am thinking capital gains at a rate of about 15%. I asked my accountant and she says that's the most likely scenario. I should also add the amount of income we make in a particular year. As a freelance pianist and teacher our income varies from year to year. We are looking at down sizing and I am sure I will buy another instrument for about the same amount or +- 5 grand. I would like to know if someone here has had any experience with a similar situation. I have done a bit of research on line and it looks like the amount will be considered a profit therefore there will be tax consequences. Are there any benefits in trading the instrument (tax wise) instead of selling it? What happens if I buy a new instrument the same year for about the same amount? Does it come out in the wash?? Thanks to all in advance.

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Well, I know nothing about US tax law. But I do not understand why you are liable for capital gains if you sell it for less than you bought it for?

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Originally Posted by David-G
Well, I know nothing about US tax law. But I do not understand why you are liable for capital gains if you sell it for less than you bought it for?


He'll owe capital gains tax because he's already written off the original cost through depreciation over the years. So he'll owe tax on the "gain" of whatever amount greater than zero that he sells it for.

A different way to look at it is that he's told the IRS that his total cost to own the piano was 40k, when actually it was only 5k (assuming a sale of 35k). So the IRS in turn "waived" taxes on 40k of income, since the piano used to do business cost that much, but in reality it only cost 5k, so he'll owe taxes on the difference.


The above is an oversimplification, but a better tax strategy, assuming that the current piano is worth rebuilding, might be to rebuild it, and thereby avoid the capital gains tax, and write-off or depreciate the cost of the rebuild.


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Hey Graycat
Don’t you think you should discuss your options with a tax attorney???? Doing your own internet research is great, but I don’t think that replaces professional advice


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Yeah-- there will be lots of special cases that might only apply to brown pianos sold on a Tuesday. Talk to a CPA with some expertise in your business.

Trading is one thing I'd ask about to postpone gains. You can do that with houses to some degree, for example.

The other thing is to be sure that you declare the gain properly. If it is stock, the lower c/g rate would apply. Collectibles, however, often get dinged at a much higher rate. Not sure how professional tools get classified on all this. Since you were using depreciation to lessen ordinary income, I wouldn't assume that you can get it back on the sale and be taxed at a much lower rate.

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Is keeping the piano an option? If so what rebuilding is needed (on a 7 year old piano)?


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Why would a piano ever depreciate to zero?


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What is a typical depreciation rate on pianos? $35K for a $40K piano after 10 years seem rather a high value?

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Originally Posted by graycat89
...I am thinking capital gains at a rate of about 15%.
Not in this case. Any gain, up to the amount of depreciation taken, is subject to depreciation recapture, meaning it's taxed at ordinary income rather than capital gains rates. This rule is fair considering you got to write off the depreciation against ordinary income in earlier years.

Originally Posted by Maestro Lennie
Trading is one thing I'd ask about to postpone gains. You can do that with houses to some degree, for example.
You used to be able to do that with non-real-estate tangible property used in a business, but not now. Even then, you still got taxed to the extent you walked away with any money in your pocket on the trade after a gain.

Originally Posted by David-G
I do not understand why you are liable...if you sell it for less than you bought it for.
In the government's eyes, the book value is zero since OP got to write off the entire cost of the piano in earlier years, so any amount OP gets is gain from its point of view.

Originally Posted by graycat89
What happens if I buy a new instrument the same year for about the same amount? Does it come out in the wash?
Yes, as far as you are able, and choose, to write off the new instrument using its own depreciation deduction, provided you buy and place it in service for business purposes in the same year you sold the old one. Whether trading, or selling/buying, no matter what, you will be taxed at ordinary tax rates on any money that nets out of the deal(s) in your favor after both pianos have changed hands. Worst case by far is you sell the old piano this year and can't buy another one until next year.

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^ Or, here's the ultimate nightmare scenario: you sell the old piano, this year, and buy a new one, this year, but, due to supply chain constraints, you don't actually receive the new one, and thus aren't able to meet the "placed in service" depreciation requirement, until next year!

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^ Another point worthy of mention: I would avoid trading pianos (e.g., with a dealer), as you could find yourself in the unpleasant position of having to report taxable gain on the full market value of the new piano while being stuck with having to depreciate it over years instead of all in the first year.

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The only reason we are selling the piano is because we want to downsize and the piano is too large for our room. By selling the piano even though I am selling it for less than what I bought for is called "recapturing" therefore I will have to pay taxes on the final amount. I have already talked to a couple of accountants and that's seems to be the case. Will investigate even further. My accountant is in the middle of corporate tax heck so it may take a while but I will ask her to a projection looking at our taxes for the past 5 years or so. I have a terrific instrument and if turns out to be a big pain and expensive pain in the neck, I will keep it and be done with it.

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If you have to pay taxes on the recaptured depreciation, then the silver lining will be that it's on monies received.

Bookkeeping was always easy for me when I was consulting. The only business assets I ever purchased were laptops, two or three a year, but--given the rapid obsolescence of computer gear--by the time I disposed of them they were truly worthless, so there was nothing to recapture. thumb


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Originally Posted by Retsacnal
The only business assets I ever purchased were laptops, two or three a year, but--given the rapid obsolescence of computer gear--by the time I disposed of them they were truly worthless, so there was nothing to recapture.
Haha for sure. Always something with tech.

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Two things strike me. First, you bought a new piano for 40,000 and are now expecting to sell it for 35,000 (apparantly seven or more years later) so are you sure that your expectations are realistic?

Second (and more important) you've depreciated the instrument over seven years so it now has a very low book value. The depreciation has been offset against your earnings each year, so effectively you have now taken benefits for the full amount that you paid. It is not a 'penalty' for you to have to pay tax on the difference between the book value and the amount that you realise, it's a simple matter of correcting for the difference between the rate of depreciation that you have charged and the actual change in value over the period, and the same rules would apply for any kind of business asset.


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Sorry, just noticed that you bought the piano an 2011. I don't think it makes any difference to what I've written above however.


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Originally Posted by graycat89
The only reason we are selling the piano is because we want to downsize and the piano is too large for our room. By selling the piano even though I am selling it for less than what I bought for is called "recapturing" therefore I will have to pay taxes on the final amount. I have already talked to a couple of accountants and that's seems to be the case. Will investigate even further. My accountant is in the middle of corporate tax heck so it may take a while but I will ask her to a projection looking at our taxes for the past 5 years or so. I have a terrific instrument and if turns out to be a big pain and expensive pain in the neck, I will keep it and be done with it.

This is probably skirting the edge of the law but could you not simply "give" the piano away now that it is a depreciated asset? Whoever gets it could sell it without any cost to you in that scenario smile

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Originally Posted by Aritempor
Originally Posted by graycat89
The only reason we are selling the piano is because we want to downsize and the piano is too large for our room. By selling the piano even though I am selling it for less than what I bought for is called "recapturing" therefore I will have to pay taxes on the final amount. I have already talked to a couple of accountants and that's seems to be the case. Will investigate even further. My accountant is in the middle of corporate tax heck so it may take a while but I will ask her to a projection looking at our taxes for the past 5 years or so. I have a terrific instrument and if turns out to be a big pain and expensive pain in the neck, I will keep it and be done with it.

This is probably skirting the edge of the law but could you not simply "give" the piano away now that it is a depreciated asset? Whoever gets it could sell it without any cost to you in that scenario smile



Sure, the US IRS would easily believe a $40,000 asset, after 7 yrs of depreciation was now worth zero 🤣


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Originally Posted by dogperson
Sure, the US IRS would easily believe a $40,000 asset, after 7 yrs of depreciation was now worth zero 🤣

An asset's actual value is not determined by its age and/or original cost. (just like a piano's value isn't)

It's not unusual for there to be a discrepancy between its value on the books and its actual value. (that's why these IRS rules and guidance exist)

The OP explained the depreciation schedule in the opening post.


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Originally Posted by Retsacnal
Originally Posted by dogperson
Sure, the US IRS would easily believe a $40,000 asset, after 7 yrs of depreciation was now worth zero 🤣

An asset's actual value is not determined by its age and/or original cost. (just like a piano's value isn't)

It's not unusual for there to be a discrepancy between its value on the books and its actual value. (that's why these IRS rules and guidance exist)

The OP explained the depreciation schedule in the opening post.
be

Certainly, there can be a discrepancy, but s high quality, young piano going from a value of $40,000 yo zero in seven years doesn’t seem to be credible.


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