hobby tax deduction
Prior to my marriage and horse business with my husband, I owned a personal horse for about 4 years. The actual purchase price of the horse was 3500.00, but over the 4 years prior to my marriage I had quite alot of normal yearly expenses. We had an appraisel done which showed his value to be $30,000.00. He was sold for $28,000.00 thru the horse business. I had never written anything off on this animal, not even as a hobby. I have now been told that I can only write off the actual purchase cost of $3500.00 as the cost basis. Is this true, or can I also write off all of the actual expenses related to this animal prior to the horse business as long as those expenses do not exceed the selling price? My husband also had a personal horse prior to marriage and horse business that is now being used for a broodmare. She has produced 3 foals to date, one of which was sold for a very large sum of money. We also have an appraisel letter on her for $50,000.00. Her cost was only $5,000.00. We do not plan to sell her but would like to depreciate her as a business asset. Can we use the appraisel letter or just the low purchase price. Thanks for your help.
1 Answer from Attorneys
Re: hobby tax deduction
in order to deduct expenses and take depreciation, you must be engaged in a business (and this would require amended returns for prior years). if you cannot establish that you were engaged in a business, only the cost basis can be deducted from the sale price.
see: http://www.irs.gov/businesses/small/article/0,,id=99239,00.html
depreciation is based on the adjusted basis of the capital asset.
see: http://www.irs.gov/pub/irs-pdf/p946.pdf
http://www.irs.gov/pub/irs-pdf/p225.pdf
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