Don't overlook these!
Updated for 2012
You need to consider the tax impact of selling your vehicle outright and buying another in a separate transaction or trading in your old vehicle for another.
REMINDER: A LOSS incurred on the disposal of PERSONAL-USE property is not deductible unless the loss was the result of a casualty or theft. However, a GAIN on the disposal of personal-use property is taxable.
A loss on the disposal of BUSINESS-USE property, on the other hand, is deductible against business income and a gain is taxable.
For example, say you sold a vehicle that you used 80% for business and 20% for personal use and that you incurred a loss. You may deduct 80% of the loss against business income. The other 20% related to personal use is not deductible.
If you sold the vehicle at a gain (which is unlikely), and used the vehicle 80% for business and 20% for personal use, 100% of the gain is taxable and is allocated: 80% business and 20% nonbusiness.
When disposing of your old vehicle and buying a replacement, you can elect to treat the transaction as either a taxable sale or nontaxable exchange.
When You Should Sell Your Vehicle Rather than Trading it in:
If a loss would result if you sold your old vehicle, you're better off just selling it outright rather than trading it in because you can deduct the loss in the year of sale and reduce your taxes.
A loss would occur if the adjusted basis of old vehicle exceeds what you could sell it for (its fair market value).
When You Should Trade In Your Vehicle:
This is because you can defer (postpone) reporting the gain by trading it in (exchanging it) for another vehicle.
A gain occurs if...
Your gain is $500.
Figured as follows:
The depreciable basis of the new vehicle is $7,000.
Figured as follows:
The $500 gain on the trade-in is deferred. It reduces the basis of the new vehicle.
So, if you sold the vehicle the next day for $7,500, you would recognize the $500 gain at that time ($7,500 minus your adjusted basis of $7,000).
In a nontaxable exchange the rules are:
Should You Sell or Trade in Your Car: Computing Basis of New Vehicle When Trading In Old Vehicle
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