Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Thinking of having a lawn sale?  Think about the tax consequences

- by Alan Duvall 

Published in Dayton Daily News August 27, 2006 

LAWN SALE.  Imbed the sign in the front yard.  Carefully mark prices and arrange stuff for sale. Unfold the lawn chair and settle in for some profitable action. 

But beware.  There’s an IRS gremlin hiding in the bushes recording every transaction. 

Any sale of goods generates a gain or loss equal to the difference between an item’s sales price and its “basis”.  If the property was purchased, basis is equal to original cost.  

Basis of inherited stuff is equal to its value at time of death.  Basis of gifted stuff gets weird – if sold at a gain gift basis equals the basis of the donor.  Basis for loss sales equals the lesser of value or donor’s basis at time of gift.  Play with hypothetical numbers and you’ll discover some gift property sales cannot have either a gain or loss. 

Tax gremlins are not always reasonable creatures.  Personal goods sold at a gain are taxed, at favorable capital gains rates if owned over a year.  But the gremlin denies taxpayers any tax benefit from losses produced by sales of personal assets. 

If a thunderstorm wipes out your lawn, or alternatively a thief steals your goods – a deductible casualty tax loss may ensue.  The itemized loss is equal to the lesser of the stuff’s basis or value reduction, limited to the extent it exceeds $100, further limited by a 10 percent Adjusted Gross Income factor.  If that explanation is not simple enough – work your way through the aspirin-laden maze of Federal Form 4684. 

A mischievous tax leprechaun must have delighted in concocting these loss rules because we are left with a incomprehensible tax conundrum.  If a good is sold for $1 dollar for a loss – no deduction.  But if that same good is stolen or destroyed by storm a deduction is possible.  Yes, one dollar can make a difference. 

Ironically the lawn seller may actually be better off losing the stuff by way of theft or casualty than pocketing chump change at the sale.  To illustrate, assume Uncle Ernie’s lawn inventory originally cost, and is arguably still worth, $2,000.  If sold for $1, Ernie has the single greenback in his pocket and no tax deduction.  If unsold and Ernie finds the stuff stolen or storm-destroyed next morning, he has a tax deduction potentially worth as much as $660.   

Alternatively, Ernie could altruistically box up the stuff as a donation to charity.  Ernie would increase both his feelings of self worth as well as pocket a profitable charity tax deduction potentially equal to the value of donated goods. 

Motto – It may better to be a charitable saint, or even a victim, than an aspiring lawn entrepreneur. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.