car trade in

[morrisliberty]

hello,

On page 19 of Pub 463 If you traded one car [the old car] in on another car[the new car] in 2010 there are two ways you can treat the transaction. 1. You can elect to treat the transaction as a tax free disposition of the old car and the puchase of the new car or 2. If you do not make the election described in 1., you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car.
My question is how do do you determine which method to use in a particular case is better? What are the tax consequences of method 1 vs. method 2 ?

[nancy65]

Unless this is a business vehicle, there is no depreciation issue and no tax issue. If the vehicle is owned by a business, you should have a tax advisor who can help you with situations like this.

[commentator]

Nancy is correct. This is only of concern for the trade in of business use automobiles.

Publication 463 is misleading in that in incorrectly implies that an election can be made to not treat the transaction as a tax free disposition. With the given facts, the transaction is a tax free disposition under IRC Section 1031. The only election is how to depreciate the remaining basis of the old asset. Those choices are accurately described in the publication.

As for which is best, run the numbers and see.

[mwcpa]

generally, as noted by both commentator and nancy, trading in a vehicle that was for personal use only and NEVER used for business (deductions on schedule C, 2106, S corp, C corp, etc., etc.) then trading it in for a new one has no federal income tax consequences.

Now, if a business use vehicle is traded for a new one, then one needs to be worried about the issue you find in publication 463.

As commentator notes, each case is unique, you need to run the numbers....

[commentator]

One point not specifically mentioned - both the old vehicle AND the new one have to be business use for a tax deferred exchange to exist.