OAR 150-316-0567: Property Subject to Accelerated Cost Recovery System

(1)(a) In general, the Accelerated Cost Recovery System (ACRS) is available to recovery property placed in service in tax years beginning on or after January 1, 1985. “Recovery Property” means tangible property of a character subject to the allowance for depreciation. This property must be used in a trade or business or be held for the production of income. (b) Property is considered placed in service when it is in a condition or state of readiness and availability for a specifically assigned function whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity. Where property was placed in service for personal use in a tax year which begins before 1985 and is thereafter converted to business or income producing use, the property is not recovery property for Oregon purposes. Example: Beth Muhlenberg purchased her personal residence in 1978. She is a calendar year taxpayer. On November 15, 1985 she converted her residence to rental property. The residence is considered to be placed in service when it is in a condition of readiness for a specifically assigned function whether in a trade or business, for the production of income, in a personal activity, etc. This occurred in 1978. Thus, the rental property is not considered recovery property for Oregon purposes. (2) Property Excluded from ACRS Treatment. (a) Recovery property does not include property which is placed in service by the taxpayer prior to the taxpayer’s tax year which begins in 1985. (b) Recovery property does not include property which is the subject of transactions referred to in Internal Revenue Code (IRC) Section 168(e)(4). For purposes of this rule, the following dates shall be substituted for dates used in IRC Sections 168(e)(4): (A) For “after December 31, 1980” substitute “in taxable years beginning on or after January 1, 1985;” (B) For “1980” substitute “the taxpayer’s tax year which begins in 1984;” and (C) For “January 1, 1981” substitute “the taxpayer’s tax year which begins in 1985.” (c) Recovery property does not include property which is described in IRC Sections 168(e)(2), 168(e)(3), and 168(e)(5). Example 1: Dr. Randall Farwell purchased and placed in service $20,000 of dental equipment on January 18, 1984. Dr. Farwell is a calendar year taxpayer. The equipment is IRC Section 1245 class property. On June 1, 1985, Dr. Farwell decides to sell the equipment to Laura Ryan by contract under which Dr. Farwell will lease back and use the same dental equipment. Laura Ryan, is precluded from using the ACRS method because Dr. Farwell used the same equipment in a tax year prior to 1985. Example 2: Dee Brinlee purchased a house which she used as rental property in 1979. Dee is a calendar year taxpayer. Since 1984, she has been trying to sell her rental house. On July 2, 1985, she sold her rental house to her daughter Jennifer. Jennifer uses the house as rental property. The house is not recovery property to Jennifer since Jennifer bought the property from a “related person” who used it in tax years prior to January 1, 1985. Example 3: In 1980 through 1984, Gary Humphrey was in business as a sole proprietorship. Gary is a calendar year taxpayer and incorporates his business during 1985 with Gary as the sole shareholder. The depreciable personal and real property, having an adjusted basis of $50,000, was transferred to the corporation in a nontaxable transfer under IRC Section 351. Since the adjusted basis of the transferred property is carried over to the corporation, the corporation may not use ACRS with respect to the $50,000 transferred basis.