New tax legislation eliminated the tax deferral on exchanges of like-kind exchanges of property, except for real estate. This change (generally effective in 2018) may apply to more transactions than you think. For instance, it comes into play when you trade in one business car for another.
Here’s what matters for business vehicles
Under prior law, no current tax was due on an exchange of like-kind properties, like vehicles, if certain requirements were met. You only had to pay tax on any “boot” you received (e.g., cash on a car trade-in). But now taxpayers must contend with a convoluted set of rules that could result in a taxable gain.
Let’s look at an example involving a trade-in before and after the new law:
- Before the new law: You bought a truck for your business for $50,000 that has been fully depreciated. So your “basis” for computing any gain or loss is zero. If you trade in the truck for a new one costing $55,000 and give the dealer $30,000 in cash, no current tax is due on the like-kind exchange. Your adjusted basis equals your basis plus any additional amount you pay. As a result, your adjusted basis going forward is $30,000.
- After the new law: Assume the same scenario above. Although you’re eligible to claim favorable depreciation deductions for the vehicle, especially in the first year of ownership, your adjusted basis under the new rules is $55,000. Therefore, you must report a $25,000 taxable gain.
There are other tax complications, but you get the basic idea.
Keep these new rules in mind when you negotiate the price of a new business vehicle and the trade-in value of your old one. Alternatively, you might sell the vehicle personally and pay the full price for a new one. Call Carl Heinemann, your Chattanooga CPA, for help determining your best approach.