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Trading in Your Vehicle
Tax Cuts and Jobs Act (TCJA) Changed the Rules
On December 22, 2017, the TCJA was signed into law. It was the most comprehensive tax law reform since 1986, and affects every American taxpayer and industry. Beginning January 1, 2018, new rules apply to trade-ins of business vehicles.
The New Rules
Beginning January 1, 2018, the section 1031 tax-free exchange treatment for personal property, including vehicles, was eliminated. Note that the 1031 tax-free exchange only applies to personal property and not real property.
Therefore, the tax deferred treatment of a gain on a trade-in is no longer permitted. Instead, a gain (if any) must be treated as a taxable event in the year of the trade-in. This means, a trade-in will be treated as a sale of business property and reported on Form 4797.
Under prior law, before 2018, a gain on a trade-in was deferred by reducing the depreciable basis of the replacement vehicle by the amount of the gain.
For example, under the prior law, if the cost of a new vehicle was $45,000 and the gain on the trade-in was $15,000, the depreciable basis of the replacement vehicle would reduced to $30,000 ($45,000 minus $15,000) and the $15,000 gain would not have to be currently recognized.
Example - Treatment of Trade-in the new law (TCJA)
- You're self-employed and purchased a pick-up truck several years ago for $40,000.
- Business use was 100%
- In 2018, the truck is fully depreciated
- Tax basis of the old truck in 2018 is zero (cost $40,000 minus depreciation $40,000).
- In 2018, you trade in your old truck for a new one.
- The cost of the new truck is $45,000.
- The dealer gives you a $15,000 trade-in allowance.
Results:
- You recognize a gain of $15,000 (trade-in allowance $15,000 minus adjusted basis of old truck $0). The gain is taxed at ordinary income tax rates to the extent of depreciation.
- The depreciable basis of the new truck is $45,000.
- Report the $15,000 gain on Form 4797.
Personal Use of Vehicle
Under both the old law and new law (TCJA), losses on the disposal of property used for personal use are still not deductible. So, if a vehicle is used less than 100% for business purposes, any loss attributable to personal use would not be deductible.
For example, if you had a loss of $1,000 on the disposal of your vehicle that was not in connection to a casualty or theft, and you used the vehicle 80% for business and 20% for personal use, $800,would be deductible for business purposes (80% x $1,000). The remaining 20% or $200, would not be deductible.