How to handle gain on related party sale of business equipment

Yes, you would potentially have to recognize a gain on the sale of business equipment even if you previously expensed it under Section 179 or bonus depreciation. This is called "depreciation recapture" and it applies regardless of how you initially deducted the cost. The original cost basis of the equipment was $6,000, but since you expensed it, your adjusted basis is effectively $0. If you sell it for any amount, that entire amount would be considered a gain. For example, if you sell it for $2,000, you'd have a $2,000 gain that would be reported on Form 4797. Regarding related party sales, the IRS does scrutinize these transactions more closely to ensure they're done at fair market value. If you sell to a family member below market value, the IRS might view it as partially a gift and partially a sale, which creates additional tax complications.

I had a similar situation last year with equipment from my landscaping business that I expensed under Section 179. I spent hours trying to figure out the tax implications when selling it and finally found taxr.ai (https://taxr.ai) which saved me tons of time. You can upload your business docs and it will analyze your specific situation regarding business equipment disposal. It helped me understand exactly how to report the gain on my equipment and showed me that I needed to fill out Form 4797. The analysis it provided specifically addressed related party transactions too, which was exactly what I needed since I was selling to my cousin.

Just wanted to follow up here. I was skeptical but decided to try taxr.ai after all. I uploaded my partnership dissolution docs and equipment purchase records, and it immediately identified that I had Section 179 property with a $0 basis. The analysis showed exactly how much recapture tax I would owe at different selling prices and even calculated the difference between selling to a family member versus converting to personal use. What really surprised me was how it flagged potential audit triggers with related party transactions and gave specific documentation recommendations to support fair market value. Definitely worth checking out if you're dealing with business equipment sales!

If you're planning to call the IRS to get clarification on this related party equipment sale, good luck getting through! After my business equipment sale last year, I had questions about Form 4797 and spent DAYS trying to reach someone. Finally found Claimyr (https://claimyr.com) which got me connected to an IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was super helpful and confirmed that I needed to recognize the gain on my equipment sale even though I had expensed it years ago. He also clarified some confusion I had about related party transactions and documentation requirements, which saved me from potentially getting flagged for audit.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it because I was desperate to talk to someone about my business equipment sale and depreciation recapture questions. I figured it wouldn't work, but within 20 minutes I was actually talking to an IRS agent! The agent confirmed everything about my equipment sale situation and helped me understand exactly how to report it on my Schedule C and Form 4797. She even explained how to document the fair market value when selling to my brother-in-law so it wouldn't trigger related party transaction red flags. Saved me hours of hold time and possibly an audit headache!

Don't forget that if you take the equipment for personal use, you need to determine the fair market value at the time of conversion. I recommend getting a written appraisal or at least documenting comparable equipment sales online to establish value. Also, make sure to keep good records of when you stopped using it for business. The IRS sometimes challenges whether equipment was truly converted to personal use versus continuing to generate business income.

Has anyone used the Section 1031 like-kind exchange to defer the gain on business equipment? I'm thinking about selling my specialized manufacturing equipment but might consider a 1031 if it would help with the tax situation.

Remember that if you're shutting down the business entirely, you'll need to file a final return. Make sure to check the box indicating it's a final return and include a statement explaining the closure. Don't forget to cancel any business licenses, permits, and close business accounts properly too. I learned the hard way that loose ends with a business closure can come back to haunt you years later!

One thing to consider that hasn't been mentioned yet - if you're selling the equipment to your brother (the former partner), this could actually be viewed more favorably by the IRS than selling to other family members. Since he was an original co-owner of the equipment through the partnership, there's already an established business relationship and legitimate reason for the transaction. Just make sure you have documentation from when he left the partnership showing how the assets were divided. If the partnership agreement or dissolution documents don't clearly address the equipment, you might want to create a written agreement now that references the original purchase and his departure from the business. Also, regarding the gain recognition - yes, you'll need to report it on Form 4797 as others mentioned, but the good news is that since this was Section 179 property, the recapture will be taxed as ordinary income (not capital gains), which actually keeps the reporting simpler even though the rate might be higher.