How the New Tax Law Affects Auto Trade-ins
posted Oct 18, 2018 by Harold Shapiro, CPA in the Global Tax Blog
The new tax law brings some good news regarding auto trade-ins. Prior to the Tax Cuts and Jobs Act (TCJA), when a taxpayer traded one vehicle for another, no gain or loss was recognized as it qualified as a like-kind exchange under code section 1031. Under the Tax Cuts and Jobs Act, this is no longer the case…Learn more.
The old rules
Treating trade-ins as like kind exchanges often posed a problem as vehicles were being carried on the books at extremely high bases as the old luxury automobile depreciation rules limited how much of an auto’s basis could be written off each year. When a new auto was purchased, the adjusted basis (cost of old auto, less accumulated depreciation) was added to the cash paid for the new vehicle, which resulted in a high basis for the vehicle.
The new rules
Under the Tax Cuts and Jobs Act (TCJA), the old rules do not apply. Starting in 2018, the like-kind exchange treatment is limited to the exchange of real property. Exchanges of vehicles after Dec. 31, 2017 may involve a taxable gain or a loss.
Gain or loss will be recognized on the vehicle traded-in depending upon the trade-in value and remaining basis in it. The new vehicle’s basis for depreciation will be its cost and will be subject to the new limits for depreciation of vehicles which is significantly higher than the old limits.
Example: ABC Corp trades in an auto with an adjusted basis of $40,000. They purchase a new auto for $60,000 and receive $20,000 for the trade-in of the old auto. ABC will have a recognized loss on the old auto of $20,000 and have a new basis for depreciation of the new auto of $60,000.
Under TCJA, the non-recognition of gain or loss will be limited to the exchange of real property used in a trade or business or held for investment.
Planning opportunities ahead
2018 and future years bring about a planning opportunity for taxpayers with high basis autos. We have told taxpayers in the past that it is better to sell their high basis vehicle to an unrelated party to take a loss. This will no longer be the case since the new tax law allows for recognition of gain or loss on the trade-in of an auto.
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