Computing Basis of New Vehicle When Trading in a Vehicle

When you trade in a vehicle for another one, how you compute the basis of the new vehicle hinges on your business use percentage of the old vehicle.

100% Business Use

If you used your old car 100% for business and subsequently trade it in for a new one, your basis in the new vehicle is equal to the remaining basis in the old vehicle, if any, plus any other amount you paid for the new vehicle.

Less than 100% Business Use

If you used your old vehicle less than 100% for business, a special trade-in adjustment is required to establish the depreciable basis of the new vehicle. Keep in mind that this adjustment has you pretend you used the old vehicle 100% for business up to the trade-in date even though you actually did not.

This adjustment is only used for determining the depreciable basis of the new vehicle, not for figuring gain or loss.

Here are the steps to follow if you used your old vehicle less than 100% for business:

OLD VEHICLE

Determine excess depreciation:

  1. Figure the amount of depreciation you theoretically would have been allowed to deduct for the old vehicle, from the date it was placed in service up to the date of the trade-in, had it been used 100% for business.
  2. Jot down the amount you determined in Step 1.
  3. Next, add up the amount of depreciation you actually claimed on your old vehicle based on your tax returns .
  4. Finally, subtract the amount of depreciation in Step 3 (what you actually claimed) from the amount figured in Step 1 (what you theoretically could have claimed). The difference is excess depreciation and is the amount used in the basis computation for the new vehicle explained below.

NEW VEHICLE

Basis computation:

(A) Start with the basis of the old vehicle before deducting the excess amount figured above. In other words, this would be the original cost minus the actual depreciation you claimed on your tax returns.

(B) Add any additional amount you paid to acquire the new vehicle to the basis of the old vehicle figured in (A) above. For example, if your forked over some cash in addition to your trade-in.

(C) Subtract the excess depreciation figured under the steps listed for the old vehicle from the total figured in (A) and B), above.

(D) The depreciable basis in the new vehicle equals: (A + B) - C.

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