Is trading in a vehicle a like-kind exchange?

Is trading in a vehicle a like-kind exchange?

The Tax Cuts and Jobs Act brought some good news in this area. Learn more about what has changed regarding auto trade-ins. Prior to the Tax Cuts and Jobs Act (TCJA), when a taxpayer traded one vehicle for another, no gain or loss was recognized as it qualified as a like-kind exchange under code section 1031.

What is a like-kind exchange example?

The IRS considers all “Investment Properties” to be “Like-Kind.” Properties do not need to be the same type. For example, raw land can be exchanged for an office building, a warehouse can be exchanged for NNN retail property, or a rental house for a Replacement Property Interest in a 300-unit apartment complex.

What is considered like-kind exchange?

Like-kind exchanges — when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or “like-kind” — have long been permitted under the Internal Revenue Code.

How do you treat trade-in for tax purposes?

Instead, when you trade-in an old vehicle for a new one, you must pay income tax on your gain, if any. To the extent your gain is due to the depreciation deductions you took on the vehicle in a prior year, you pay tax at ordinary income tax rates, not usually lower capital gains rates.

Are car trade ins taxable?

In California, the sales tax will not account for the amount you received when trading in your vehicle says the Sales Tax Handbook. If you purchase a vehicle for $12,000 and traded in your old vehicle for $6,000, you still have to pay taxes on the $12,000 the car originally sold for.

How do I register my car for trade-in?

Example of a Trade-In Vehicle

1. Debit: New Van – $50,000.00.
2. Credit: Old Van – $15,000.00 [this removes the old van]
3. Debit: Accumulated Depreciation – $10,000.00 [this removes the depreciation taken on the old van]
4. Credit: Cash – $42,000.00 [this is the amount spent for the new van]

How long do you have to do a like-kind exchange?

The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary.

What if you sell a vehicle that you depreciated?

There is no depreciation recapture if a loss was realized on the sale of a depreciated asset. In the example above, the business took 100% of the value of the vehicle in depreciation, which is recaptured when calculating the gain on the sale or trade of the vehicle.

What is the basis of a like kind exchange?

With a like-kind exchange you recognize zero gain on the trade in of the first vehicle and your basis in the new vehicle is your $5k of remaining basis plus the $20k of cash, so you have a $25k of depreciable basis in the new vehicle. The new tax bill removes the ability for every business to do a like-kind exchange with vehicles.

When does like kind trade in become taxable?

Starting in 2018, the like-kind exchange treatment is limited to the exchange of real property. Exchanges of vehicles after Dec. 31, 2017 may involve a taxable gain or a loss. Gain or loss will be recognized on the vehicle traded-in depending upon the trade-in value and remaining basis in it.

Is the new tax bill a like kind exchange?

The new tax bill removes the ability for every business to do a like-kind exchange with vehicles. The only property allowed to be used in a like-kind exchange is now real property, so all the vehicles are out. Let’s run through that example again without the use of a like-kind exchange.

Is there a like kind exchange for auto finance?

This window provided an opportunity for auto finance companies to realize the benefits of like-kind exchange before the opportunity closed. In the same way that people stand for the last out of a baseball game, seasoned tax specialists anticipate the IRS will pursue like-kind exchange with a heightened level of scrutiny in upcoming audit cycles.