43.9 Trade-in of Business Vehicle

No gain or loss is recognized when you trade in your old car, truck, or van for a new one where you opt to treat the disposition as tax free (different rules apply if you do not make this election, as explained in IRS Publication 946). However, the trade-in affects the basis of the new vehicle for purposes of depreciation. The basis adjustment depends on whether the car you traded in was used solely or partially for business.

Old vehicle used entirely for business.

The basis of the new vehicle acquired in the trade-in is the adjusted basis of the old vehicle (its cost reduced by depreciation deductions), plus any cash you had to pay.

If you claimed first-year expensing, or bonus depreciation, you must make additional adjustments to basis (see IRS Publication 463).

Old vehicle used partially for business.

There is a special “trade-in adjustment” for cars, trucks, or vans used for both personal and business use. This adjustment reduces the basis of the new vehicle (but not below zero) by the amount of depreciation you would have claimed if you had used the old vehicle entirely for business. To figure the basis of the new vehicle, including the trade-in adjustment, start with the adjusted basis of the old vehicle (see above). Add any cash you pay to acquire the new vehicle. Then subtract the excess, if any, of the depreciation you could have claimed had you used the old vehicle entirely for business over your actual depreciation for the old vehicle (the trade-in adjustment). See the examples in IRS Publication 463.

Caution

Trade-in Adjustment

The trade-in adjustment is not used for determining gain or loss on the disposition of the new car when it is later sold. It is used solely for depreciation purposes.

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