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Jason M. Tyra, CPA
Jason M. Tyra, CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 178
Experience:  Principal at Jason M. Tyra, CPA, PLLC
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We had a business car that had a 0 book value and had a loan

Customer Question

We had a business car that had a 0 book value and had a loan outstanding of $24700
We leased a new car and traded in the car above. The dealership gave us $18000 for the old car and paid off the loan of $24700 for a net trade equity of -6770. Do we show a taxable gain of 24700 for the loan that was paid off or is there another way to record this trade and lease deal
Submitted: 9 months ago.
Category: Tax
Customer: replied 9 months ago.
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Expert:  Jason M. Tyra, CPA replied 9 months ago.

The sale price for the old car should be shown on the bill of sale or other documents provided by the dealer. The amount is likely to be $18k, since the balance was rolled into a new loan.

Customer: replied 9 months ago.
They gave us 18000 as trade in allowance and paid off the loan of 24770 . This was all put into lease for new car
Expert:  Jason M. Tyra, CPA replied 9 months ago.

Did they actually pay off the loan or was the $6770 just added to your new loan?

Customer: replied 9 months ago.
they paid off the loan and included it in the new lease for new car we had a negative trade equity of -6771
Expert:  Jason M. Tyra, CPA replied 9 months ago.

Ok, then $18k is your depreciation recapture on the sale. Report it on Form 4797 with your tax return for the year of the sale.

Customer: replied 9 months ago.
We need to write the loan of 24770 off the books. since it was paid off. do we also consider that as a gain and pay taxes
on it. Is the entryLoans Payable 24770
Gain on sale of old car 24770
Customer: replied 9 months ago.
the total gain for this transaction is $42,700?. 18000+24770 And since we leased and did not purchase the leased car we
have to report all this gain?
Expert:  Jason M. Tyra, CPA replied 9 months ago.

Your only gain is on the depreciation recapture from the sale in the amount of $18k. The unpaid balance from the old loan should be transferred to the new loan account. The old car can be marked as disposed and the new car added as new property.

The new loan is not a gain, it is a liability.

Customer: replied 9 months ago.
The new car is a lease not new loan
Expert:  Jason M. Tyra, CPA replied 9 months ago.

Then you will need to divide your monthly payment between the operating portion of the lease and the negative equity / loan repayment portion.

How to set that up in your accounting system is a little beyond the scope of your original tax question concerning taxable gain.

Customer: replied 9 months ago.
My original question asked how much gain we show for tax and we did say new car was leased
Expert:  Jason M. Tyra, CPA replied 9 months ago.

I answered that question: you have an $18k gain on the disposal of the old car.

Customer: replied 9 months ago.
what is your answer for the loan writeoff
Expert:  Jason M. Tyra, CPA replied 9 months ago.

That is a separate transaction. There is no gain or loss to report on a loan repayment or refinance. The $18k you received for your trade went toward loan repayment and the balance of the loan will be amortized over the term of your lease.

Expert:  Jason M. Tyra, CPA replied 9 months ago.

Think of it this way- do you report gain when you make your loan payments? (No.) Then you shouldn't report gain when you repay it all at once.

Customer: replied 9 months ago.
Thanks Now we know about the gain and the loan
Expert:  Jason M. Tyra, CPA replied 9 months ago.

No problem, glad I could help. Good luck and please don't forget to rate.

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