44.4 Gifts and Inheritances of Depreciable Property

Gifts and charitable donations of depreciable property may be affected by the recapture rules. On the gift of depreciable property, the ordinary income potential of the depreciation carries over into the hands of the donee. When the donee later sells the property at a profit, he or she will realize ordinary income (44.1). A person receiving a gift of low-income housing property includes in the holding period the period for which the donor held the property for purposes of applying the 200-month phaseout of recapture rule (44.2).

On the donation of depreciable property, the amount of the contribution deduction is reduced by the amount that would be taxed as ordinary income had the donor sold the equipment at its fair market value.

The transfer of depreciable property to an heir through inheritance is not a taxable event for recapture purposes. The ordinary income potential does not carry over to the heir because his or her basis is usually fixed as of the date of the decedent’s death.

Important: A gift of depreciable property subject to a mortgage may be taxed to the extent that the liability exceeds the basis of the property (14.6, 31.15).