Tax Guru – Ker$tetter Letter

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Vehicle Swap

Posted by taxguru on February 11, 2006

Q:

Subject: 179 Depreciation
 
I have a vehicle placed in service December 19, 2003.  I used the full first year depreciation in the 2003 tax year.  I am now considering trading it off and leasing a different vehicle.  What are my tax consequences for the vehicle I trade off and for my new vehicle? 
Example; Would I owe back depreciation.  I have a $12,000 payoff on my current vehicle.

 

A:

If you expensed the entire cost of your vehicle on your 2003 tax return, its adjusted cost basis on your books is zero.  Whatever you sell it for will be taxable as depreciation – Sec. 179 recapture.  Even if you don’t receive any money and the loan is paid off, you will have a sale for the $12,000 loan balance.

If you trade it in for the purchase of a more expensive business vehicle, the gain can be deferred by reducing the cost basis of the replacement vehicle.

Selling the current vehicle and then leasing a new one will not qualify unless you trade it in and the lease is treated as a purchase, such as with a one dollar buy-out at the end.  If the buy-out is the vehicle’s fair market value at the end of the lease, that is not the same as a purchase.

You really should be working with personal tax pro to see what is the best strategy for you.  I have almost always found that leasing vehicles is a much more expensive (rip-off) way to go than a normal purchase; so you should work with your personal tax advisor to see if that makes sense.

Good luck.

Kerry Kerstetter

 

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