Thank you for your question.
Do I understand correctly that you exchanged an old vehicle for a new vehicle?
That this appears to be a likekind exchange of equipment used in business?
Thank you for the information.
Since you did not take the election, then you can not treat it as a like kind exchange. (you already seem to know this). You can not amend a return to do the like kind exchange. It had to be designated befor the closing and you had to use a like kind exchange agent. You can not do it after the fact.
So the way this transaction should look is:
1. When you traded the old vehicle, the trade became the dispostion or sell price. So the Value of the trade in became your sell price. So you would report that sale on schedule D, and determine if it was a capital loss or capital gain. You would also be subject to paying recapture tax on any accumulated depreciation. IN most cases, where you experience a capital loss, your recapture tax is reduced or eliminated.
2. For the new vehicle, I assume the vehicle secures the total new loan, which included rolling over the payoff from the orginal vehicle. (let me know if this is not true).
Your cost basis for the new vehicle is the New vehicle cost: 32,508 dollars.
The new warranty and other fees including the old balance owed are loan expenses that have to be capitalized over the life of the loan.
thank you for the additional information. I did not quite get, apparently what you were getting at. BUT yes, you would treate it as option two...but you can give it the treatment I suggested.
However, as I re-read your question you were asking specifically about the basis.
IRS Publication 946 states an alternative that is better for you. (referred to 946 by publication 463).
.1. Treat the old vehicle as a disposition. as I already stated. BUT,
2. IRS code allows you to take the adjusted cost basis of the old vehlcle and continue to treat it as if it were placed into service, seperate from the new vehicle as of the date of the trade.
Remembe on property, you are taking a depreciation not deducting the loan itself.
In your case, the vehicle you traded was underwater, so you have some additonal costs to take. That is why I recommended the first expensing method.
If its ok, I need to have someone take a fresh look at this, and I would like to refer you to another tax expert.
Since you did not elect to report this as a like kind exchange - you are going to have 2 assets on the depreciation schedule.
1. Old vehicle with the remaining cost basis $18,615(as it appears) and depreciate it over the remaining life. You may want to rename it to Old vehicle traded in for XYZ vehicle.
2. New vehicle - with cost basis equal to the basis over the old vehicle's carryover basis. Normally the basis in the property is the cost basis of the old property plus any additional amount you pay. Since the cost basis of the old asset is considered separately. The cost basis for new vehicle would be the additional amount you pay which is New Loan amount - the old loan amount taken over for the old vehicle. So the basis would be $36394 - $16,306 (which is the loan from the old vehicle) = $20,088 as this would be the loan pertaining to your new vehicle.
Note that no loss is recognized on this disposition. It is deferred until the new vehicle is disposed off.
Here is an extract from the publication 946 explaining this in detail-
If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. If the automobile acquired in the trade-in is qualified GO Zone property, the carryover basis is eligible for a special depreciation allowance. See Qualified Gulf Opportunity Zone Property in chapter 3. Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. This excess basis is the additional cash paid for the new automobile in the trade-in.
The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. Special rules apply in determining the passenger automobile limits. These rules and examples are discussed in section 1.168(i)-6(d)(3) of the regulations.
Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
You are depreciating the total amount of $20,088 and $18,615 which is actually more than the cost of the new vehicle which is appx. $37K. This is because the loss on sale of the old vehicle is not recognized but is defered until you sell the new vehicle.
If this would not be a trade in situation than you would have taken the old vehicle out of the balance sheet reported the loss on sale of the old vehicle and recorded the new vehicle at $37K.
Regarding your other question-
"When you say "Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in" Isn't that the same as doing a like kind exchange? "
Yes that is correct. It is like doing a like kind exchange. But since you did not elect that method, you cannot report it in this manner.
You could do the above(as stated by you in your question) if you elected to report it as a like kind exchange.
But since you did not elect to report it as like kind, you will report it in the manner posted in my post earlier.
I do understand that this is confusing.
I would suggest you to calculate the depreciation as discussed in my post. To the best of my belief the depreciation calculated by you and the depreciation based on the method I suggested would almost be the same. If the depreciation claimed by you is more that what is should be using the method as discussed than you may want to amend the tax return and report the correct depreciation amount.
Thank you for your comments and feedback.
When you accept the answer, please accept on RD as I opted out and he gets the payment.