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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...
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: 2 years ago.Category: Tax
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Customer reply replied 2 years ago
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2/24/2016
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago
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Jason M. Tyra, CPA, Certified Public Accountant (CPA)
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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.

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Customer reply replied 2 years 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
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago

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

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Customer reply replied 2 years ago
they paid off the loan and included it in the new lease for new car we had a negative trade equity of -6771
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years 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.

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Customer reply replied 2 years 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 reply replied 2 years 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?
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years 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.

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Customer reply replied 2 years ago
The new car is a lease not new loan
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years 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.

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Customer reply replied 2 years ago
My original question asked how much gain we show for tax and we did say new car was leased
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago

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

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Customer reply replied 2 years ago
what is your answer for the loan writeoff
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years 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.

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Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years 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.

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Customer reply replied 2 years ago
Thanks Now we know about the gain and the loan
Tax Professional: Jason M. Tyra, CPA, Certified Public Accountant (CPA) replied 2 years ago

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

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