Bussiness auto trade-in rules

[Bees Knees]

The above assumes Line 2 total depreciation is based on 100% business use. If line 2 total depreciation is not based on 100% business use, then you would have to continue with the worksheet for lines 6, 7, and 8 to arrive at the depreciable basis of the new car.

[S T]

A Great Big Thank You

Bees, I can't thank you enough for spending the time on this!

It has been a great learning issue!, first the election TB 10-9, and the calculation based on the worksheet on TB 10-2. Then working through the 8824 rules and in this case the "negative" on the trade in.

I'll work the numbers now as you have outlined and adjust for business percentages.

Maybe the 2006 TB and Web CD will include further examples on this issue and the 8824 form for auto trades.

I do have one question though, I notice that there is no entry for the $13,000 trade in allowance on the old vehicle. That amounts lowers the t/p liability on the old note plus the $5,000 additional cash which results in the $1,063.20 added to the new note. Is the $13,000 trade in value not considered as the sales price entered on the 8824 form?

Have a great Labor Day!

Sandy

[Bees Knees]

Ooops

I think I just made a major blunder.


I was treating the 13,000 as paying off the old loan and got caught up in your negative trade in comment. My error came where I said:

The negative trade in due to the fact that the loan on the old car was greater than the down payment plus trade in value means that Boot paid for the new car has to be the total price of the new car, since nothing from the old car could be used to buy down the cost of the new car. Negative value has no value.

That’s not true. Off course the 13,000 bought down the cost of the new car. If the dealer hadn’t assigned any value to the old car, the loan on the new car would have been 13,000 greater.

So in my backdoor way of explaining “Boot,” I left out a major ingredient, that it should be reduced by the 13,000.

That means boot should be 65,124 minus 13,000 = 52,124
And the basis of the new car is now 14,290 + 52,124 = 66,414

A simpler way to look at this is to take ALL references to loans out of the picture.

Cost of new car = $66,867
Fees deducted currently rather than added to basis = 490 + 1,253 = 1,743
66,867 – 1,743 = 65,124
Trade in value without considering loan pay offs = 13,000
65,124 – 13,000 = 52,124
Basis of old car = 14,290
Basis of new car = 52,124 + 14,290 = 66,414

So on the worksheet, use 52,124 for line 4 Boot instead.

You have to take all loan financing numbers out of the equation. When you look at the basis of an asset, it doesn’t matter whether that asset was purchased with cash or financed. In your case, the taxpayer owed more on the car than what it was valued at in the trade in, thus a negative trade in. But the negative trade in is only negative for loan financing purposes. It just means the taxpayer had to take extra money out of his pocket to pay off the loan. But the basis of that car still remained the same, regardless of how the old loan was settled. The $5,000 down payment and the 1,063 old loan amount being added to the new loan are basically ignored since they would simply be considered payments on a previous loan with the left over balance being added to the new loan. Those transactions do not affect basis. However, we do take the 13,000 into consideration because it reduced the cost of the new car by holding down the cost of the new financing.

I hope this makes more sense now. Sorry for before.

[S T]

Easy to Understand

Thanks Bees, you always find a way to offer explanations that can be easily understood . Glad this "Trade" is done, all printed up with notes and ready to go when I receive my 2006 software.

Sandy

[Unregistered]

LKE treatment is not elective and you can have a deferred loss which increases the basis of the acquired property.