Auto trade?

[TAX4US]

Correct me if I am wrong. TP had a business auto in which mileage was always used. In 2015 TP stopped business use. It became a 100% personal use. In 2016 tp traded this vehicle for another one that is personal use. Even after calculation for mileage dep the trade value creates a loss. I contend the loss is NOT deductible but increases the basis of new one should tp move it to business. Am I ok with this thought?

[Roland Slugg]

There is no LKE for personal use property. It applies only to property used in a business or held for investment. The transaction described is simply the "sale" of the old vehicle for the trade-in allowance, producing a non-deductible loss, and the purchase of another vehicle. The basis of the new vehicle is its purchase price.

[Snaggletooth]

Disagree

I track business mileage, percentage of business use, and cumulative depreciation at whatever rate is prescribed (In 2016 the depreciation element of the 54 cents was 24 cents per mile). The mileage rate is inclusive of the depreciation and gains upon disposal are supposed to be ignored.

A "loss" upon sale is deductible on 4797. A "loss" buried on a trade in will increase the basis of the new vehicle.

The "trick" involved is that the calculation can only recognize the percentage of business use and not the full value of the vehicle. A $36,000 car with a business usage of 75% has an original basis of $27,000. If 40,000 miles of business usage are logged, there is (40,000 X .24) or $9600 in depreciation logged against it. If sold for $10,000, the calculation of money received is only $7500. Such a loss is $10000 proceeds minus $27,000 in original basis plus $9600 in depreciation, for a reportable loss of $7,400.

If the above vehicle is traded in along with $25,000 for a new vehicle, then $9867 is added to the original basis before business use. ($7400 loss divided by .75 = $9867) New vehicle basis is $34,867 before considering business percentage of the new vehicle.

Detailed discussion of this is explained in TTB pages 10-8 through 10-10. If the "actual" method is used instead of standard mileage rate, the calculation can result in a reportable gain.