trade in of auto

[theresa d]

i think i'm missing something. the trade in of an auto is considered a tax free exchange. the old asset stays on the books and continues to be depreciated and the excess basis on the new auto is depreciated. or the taxpayer can make an election to combine the cost basis of the two autos and depreciate one asset. the depreciation limits apply to the total depreciation on the two autos combined. it seems to me that both methods result in the same depreciation- however keeping track of two seperate pieces of the same auto is more confusing. am i missing something?

[OldJack]

Yes... if you elect to combine basis you can calculate regular depreciation on the combined cost basis as a new asset item, however, you can't take §179 on the old vehicle net book value portion of basis. This is back to the old way we did it before the IRS changed things. For small business the IRS on audit doesn't seem to even look at your depreciation other than to capitalize anything you didn't.

[Bees Knees]

Well, you can't take Section 179 on the old asset even if you don't elect to combine the basis. I think that was Theresa's point.

It seems ridiculous to not use the election to ignore IRS's new rules on auto trade-ins. That has to be one of the dumbest set of rules they ever thought of. And then they let us elect to not play dumb with them. Thank you IRS for giving us an out, but what was the point in making up the new rules?

[jainen]

faster depreciation

>>what was the point in making up the new rules<<

It provides faster depreciation. It's probably not worth the paperwork on a car, but suppose it were a warehouse. You've got, say, $100,000 remaining basis after 29 years of use. You have a choice to depreciate that exchange basis over the last ten years of its life, or over a new 39 year life.

[Matt Sova]

Point of new rules

There was a point to it that did make some sense. The whole idea behind it was that you had to track all prior depreciation. Therefore, if you sold the new item that you traded for you would recapture all the prior depreciation rather than having a large capital gain.

Example

Building cost 150k Accum Depr 100k. Traded for new bldg with boot paid of 500k.

Under the old rules the basis of the new bldg is 550k with no Accum Depr. Under new rules new building has 650k cost with 100k accum depr.

New building sold 5 months later for 800k (assume no more depr taken).

Under the old rules they have a 250k LTCG taxed at 15% max rate. Under new rules they have a 150k LTCG taxed at 15% and Sec 1250 Depr Recapture of 100k taxed at 25%. Result is 10k more in income tax.

[OldJack]

I don't think anyone was suggesting that real estate basis was a problem on a Like Kind Exchange as it is not something that happens every year. It was the vehicles that created problems and that was what this original post was about.

[Matt Sova]

True, but

The same could happen with an automobile. For instance:

Purchased SUV in 2002 for 40,000 Section 179 40,000.

Now you could sell that SUV in 2004 for 22,000, but you trade it in along with 25,000 boot for new vehicle with a 53k sticker price. Basis in new vehicle under old rules is 25k

2005 Sell new SUV for 45k. Except for the 04 and 05 depr recapture on the old vehicle the rest of the gain is LTCG. Whereas if you calculate the gain based on tracking the basis of the old SUV and the new one the LTCG would be much less and the Depr Recap much greater.

I am not an advocate of this silliness, I am just trying to point out the reasons for it.

[OldJack]

Good point Matt!