Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

SUV Trades & Sec 179 Recapture

Posted by taxguru on August 4, 2006

 

From a Reader:

Subject: suv
 
I have spent 2 days trying to nail down the answer with my accountant and on the internet.  You have a question posted on your website that’s similar to my question-but of course not quite.  I think this is a problem that a lot of people are going to be coming up with because of gas prices.
 
I have an SUV, over 6000 lbs purchased in 2003 for $50,000 using the section 179 SUV 6000lb deduction.  I now would like to trade it in for another SUV that does not weigh 6000+lbs.  If I trade the car in, it will be traded in for about $30,000 and the new SUV will be purchased for $22,000 with the left over trade in value (after p/o of loan) going towards the $22,000.  Will I have to pay recapture on the full $30,000 (trade in value), or just on the difference between the $22,000 and the trade in value?
 
Sincerely,


KMK:

I need a little more clarification before I can provide an answer.  You have Section 1031 issues here, as well as possible Section 179.

What is the current loan balance on your 2003 SUV?

What is the total purchase price of the new SUV – $22,000 or $52,000?

What will be the total of the loan you assume on the new SUV?

What percentage of the miles you drive the new SUV this year will be for business?

Kerry Kerstetter

Reader:

Thanks for replying.  I filled in the answers below.
 
 Sincerely,

What is the current loan balance on your 2003 SUV? $24k

What is the total purchase price of the new SUV – $22,000 or $52,000? The new suv would be $22k

What will be the total of the loan you assume on the new SUV? I will receive $8k for the trade in and that will be put towards the new suv-making the loan amount $14k

What percentage of the miles you drive the new SUV this year will be for business? 100%  I have a second car that’s used for personal miles

I read on the internet that you cannot trade in a 6000lb suv for one under 6000lb as a like kind exchange-is that true as well?

 
KMK

Thanks for the additional info. 

It sounds as if you are under the impression that there could be Section 179 recapture based on one or both of the following.

1.  Trading a vehicle that weighs more than 6,000 pounds for one that weighs less because the lighter one only qualifies for a much lower maximum Section 179 deduction.  That on its own would not trigger a recapture unless the new vehicle were to be used less than 50% for business.  What would happen is the zero rollover basis from the old SUV would leave very little to nothing available for future 179 or depreciation on the new one.

2.  Trading a vehicle that weighs more than 6,000 pounds for one that weighs less because they are not considered to be like kind for full Section 1031 deferred gain treatment.  This is also not true.  Vehicles less then and over 6,000 pounds are considered to be like kind by IRS.  Whoever told you otherwise was wrong.

However, from the figures you provided, there will be approximately $10,000 of Sec. 179 recapture because you are failing to meet the equal or higher cost requirement for your trade.  You are essentially selling your old SUV for $32,000 ($24,000 loan payoff + $8,000 equity) and reinvesting only $22,000.  The remaining $10,000 of unreinvested proceeds will be taxable as Section 179 recapture.  Looked at in a slightly different way, with the exact same results, your $24,000 relief of debt is $10,000 lower than the new debt you are taking on, triggering a taxable recapture.

I’m not sure how locked in you are to the $22,000 SUV.  While I am not an advocate of spending money just to increase deductions, it is a fact that many people in this situation would seriously consider buying a new vehicle that costs at least $32,000 so that there would be no taxable recapture to worry about.  You should have your personal tax advisor crunch some numbers to estimate how much Federal + State tax that $10,000 recapture will probably cost you.  The actual taxes will be based on your expected tax brackets.
 
I hope this helps.  Good luck.

Kerry Kerstetter

Reader:

Hi Kerry,
Thank you so much!  I really appreciate your time to answer my question.  I feel a bit better-though disappointed I can’t get the car I want.  To funny-
considering I’m going from a Volvo to a Honda element.  So basically I have to choose a car that costs more.  Who would’ve thought.  Anyway, I forwarded your info on to my accountant and will have him run numbers for me so I make the best decision.  One thing I did consider was buying 2 of the elements, but I’ll talk to my accountant about that.  Thank you again and have a cool summer!
 
Sincerely,

KMK:

Fully tax free exchanges have always required acquiring replacement property costing at least as much as the net sales price of the old one.

There is no requirement to go from one vehicle to one.  You can exchange into multiple ones.  However, you have to be careful that each of the replacements is used more than 50% for business or else it will trigger some Sec. 179 recapture.

Good luck.

Kerry

Reader:

Kerry,
Do you do taxes for people in Maryland? 
 
Sincerely,

KMK:

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; but I wish you the best of luck.  

Kerry Kerstetter


Reader:

Thank you Kerry,
And I will be sure and save you in the favorites!
 
 Sincerely,

 

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