Loss on Sale or Trade of business car.

[Harvey Lucas]

Client Jill bought an expensive car several years ago that she uses 90% for business, purchase price approx 60,000.

We have always used mileage method for business deduction.

She is considering disposing of the car and leasing a new car.

If she sold the car outright to a third party for $10,000, she would have a big loss calculated by taking the original purchase price, subtracting the deemed depreciation to arrive at adjusted basis and then applying this against the sale price.

Ballpark estimate is a huge loss of around $35,000 that would go on 4797 and offset other income.

How does this work if she sells the car to the Car dealer that she is going to lease the new car from?

My hope is that since she is Leasing the new car as opposed to buying it, the trade in rules would not apply and she could treat it as a sale the same as if she sold the car to a third party and deduct the loss as illustrated.

Any help is appreciated.

Harvey Lucas

[ATSMAN]

I would agree with your reasoning. I have one question. What is the retail and wholesale value of that car as per Edmunds or Kelly Blue Book. I probably would use the wholesale value if the value the dealer assigns in the trade in is way out of line. I have seen crazy figures for trade in that dealers use to make a sale happen.

[TaxGuyBill]

I agree too. I would treat it as an outright sale, rather than a "trade-in" unless the "lease" is a disguised sale.


Wow, the vehicle went down in value by $50,000 for roughly 50,000 miles? Wow, that's a $1 per mile of depreciation. It's crazy how fast expensive vehicles go down in value.

[Roland Slugg]

Wow, the vehicle went down in value by $50,000 for roughly 50,000 miles? Wow, that's a $1 per mile of depreciation.

It's probably more like 70,000~80,000 miles based on the depreciation element of the SMR ... currently $.23/mile but was less in prior years. In any case, you're right: Expensive cars are, well, expensive to own!

It has never occurred to me that "selling" a car to a dealer and then leasing a new car from the same dealer might constitute a TF exchange. But it might. A lease that contains an option permitting the lessee to buy the property may be construed as a sale. Accordingly, I would be careful here. If it were my client, I would advise her to try to sell the vehicle elsewhere.

Since the business use of the car has been less than 100%, the loss on its sale must be allocated between business and personal, too.

[TaxGuyBill]

It's probably more like 70,000~80,000 miles based on the depreciation element of the SMR ... currently $.23/mile but was less in prior years.

Since the business use of the car has been less than 100%, the loss on its sale must be allocated between business and personal, too.

I'm curious on your math. I based my estimated 50,000 miles on a $35,000 deductible BUSINESS loss. You must have used a $35,000 TOTAL loss, right?

My math:

90% purchase price ($54,000) minus 90% sale price ($9,000) equals $45,000 business loss before depreciation.
If $35,000 is the deductible BUSINESS loss, that means there was $10,000 of depreciation.
$10,000 of depreciation at $0.22 per mile (estimated average) equals about 45,500 business miles.
45,500 business miles at 90% would be about 50,500 total miles.


Sorry, I didn't mean to go off on a tangent. There is an excellent chance that your calculation is what the OP meant.

[Harvey Lucas]

Thank you for your feedback gentleman, most appreciated, a good example of why I love this forum and Tax Book

Yes, I was concerned about the "lease disguised as a sale" issue too.

Normally it probably wouldn't matter, however, If I put this huge loss on 4797 it would probably draw some attention for them to take a closer look.

To avoid any possibility of a loss of the deduction I will advise my client to sell the car to a third party not connected to the dealer who she is leasing the new car from.

Thanks again.

Harvey Lucas

[Roland Slugg]

I will advise my client to sell the car to a third party not connected to the dealer.

Very good. That may not be necessary, but I do believe it is the safe and wise way to proceed.

One thing that I have never been able to find in the Regs, the IRS instructions to F-4797, or in any of the IRS Pubs is how to calculate the personal portion of the loss on the sale of a vehicle when the personal use percentage varied from year-to-year. I believe that the correct way to do it is to figure the overall personal use percentage for all the years it was owned, and then allocate that percentage to the selling price and adjusted basis to figure the net business loss that's deductible in the year of sale. When doing this, it would make sense to calculate the overall business/personal percentages based on the total miles the vehicle was driven.