Q:

Subject: Guru needed

 

Hello,

 

I found your site and have read a good portion of it — and learned quite a bit.  Thank you!

 

I was wondering if you could answer a question regarding 179 vehicle expensing:

 

In 2004 I puchased a new Chevy Suburban (GW > 6,000 lbs) for my business (real estate investing) and depreciated the entire vehicle in that year (~$50k).

 

Since then, the limit has been reduced to $25,000, but (I think) there remains some additional accelaerated depreciation available.

 

My question is:

 

If I trade-in (or sell) my 2004 suv in 2007 for a new (>6,000 lb gw) suv in 2007, what are the tax consequences with respect to cost recovery and depreciation of the new vehicle?

 

I understanding I’ll be trading up, no cash received (substantial cash out), and that it will be a like-kind asset exchange.  I’m hoping there’ll be

more/new depreciation to take (over a short period of time).

 

Thank you,

A:

I have covered this issue in a number of posts over the last few years; but a quick review would be useful for new readers.

While many people don’t see much difference between a vehicle trade-in and a sale, it can make a huge difference tax-wise. 

If you have depreciated (via Section 179 + normal depreciation) the cost basis down to an amount much lower than the vehicle’s current fair market value, a sale will trigger taxable recapture of some or all of the depreciation and Sec. 179.

If you trade the vehicle in for one with a value of equal or higher amount, there will be no taxable recapture.  Per Form 8824, the remaining undepreciated cost basis of the old vehicle, plus any additional amounts paid via cash and debt will become the cost basis of the new vehicle.

In regard to claiming Section 179 on the new vehicle, the rollover cost portion is not eligible; but the newly paid (via cash or debt) amounts are.  Normal deprecation is available for the amount not deducted under Sec. 179.

The opposite would be the case if the vehicle is worth less than the depreciated coat basis.  A sale would enable a deductible loss; while a trade would require the loss to be rolled over and added to the cost basis of the new vehicle.

This is why I always give my clients a copy of their next year’s depreciation schedule along with their tax returns, and advise that they check the asset’s depreciated cost basis (Book Value) before deciding whether to trade a vehicle in or sell it in an independent transaction.

Your personal professional tax advisor should be able to run the numbers for your vehicles and show you the consequences of both options.

Good luck.

Kerry Kerstetter

Q:

Subject: Exchange Question

 

New question from a client, that I have not encountered before. If 3 prospective replacement properties were identified for an exchange within 45 days of the sale of a property and none of the 3 remain available for purchase, can my client substitute a replacement prospect, close on it within the 180 day time frame and still defer the capital gains tax consequence?

A:

Based on the way in which you described your client’s situation, the answer is a very big NO. 

The only statutorily eligible reasons for an extension of either the 45 or 180 day deadlines are when the property has been affected by a Presidentially declared disaster or if the taxpayer is on active duty in a combat zone.

If the taxpayer just dawdled and let other people buy up those listed properties, IRS has no sympathy for him. 

This is why we have always advised working diligently on the acquisition phase of the exchange as early in the process as possible; ideally while the disposition phase is still in progress.

Hopefully, this lesson won’t be too expensive for your client and he will be more on top of things the next time he attempts an exchange.  If the potential tax bill is substantial, your client may want to make the new owners of the properties substantially increased offers so that he can still acquire them within the 180 day deadline.

Kerry Kerstetter