Phoebe opens a bait delivery service during the current year. In starting up the business, she decides to use her personal truck as a delivery vehicle. She had paid $16,000 for the truck, which was worth $10,000 when she turned it into a delivery truck.

a. What is her initial basis in the truck? What is her basis for depreciation on the truck? Explain.

b. After using the truck for 2 years, Phoebe sells it and uses the $5,300 in proceeds as a down payment on a new delivery van. She had correctly deducted $2,700 in straight-line depreciation on the truck during the 2 years of business use. Write a letter to Phoebe explaining the amount of gain or loss resulting from the sale and why that is the result.