[marinaavet]

Perhaps this question should be in taxes. How would a sole proprietor treat trading a business vehicle for a personal car? The truck was used 100% business with all deductions and depreciation taken. Now it was traded-in for a personal car. I am assuming you can't treat it as a like - kind exchange so how do you calculate the gain/loss on it and report it on taxes? I understand you need to figured out adjusted basis of the old vehicle but how do you figure out the amount realized? Do you take the given trade-in amount?

[AtlantaTaxExpert]

If the vehicle has been fully depreciated or if the residual value of the vehicle (purchase price minus depreciation taken) is LESS than the trade-in value, you have sold the vehicle for a capital gain which must be reported on Form 4797.

If there is a capital LOSS on the sale, that too is reported on Form 4797.

[marinaavet]

Thank you. Makes sense. So the trade in value is the amount I would be using to calculate loss or gain, correct? So the value of the personal car that was obtained through this transaction is irrelevant, correct?

[AtlantaTaxExpert]

Had problems last night; my computer would not let me type in an answer.

Yes, the personal car in this matter IS irrelevant.

[marinaavet]

Thank you!

[AtlantaTaxExpert]

Glad to help!

[marinaavet]

I understand that a loss/gain is not recognized in like-kind exchanges. So what do you do with that unrecognized loss amount on books and taxes? Do you add it to the basis of item received ? Here is the scenario:

Truck is exchanged for a similar more expensive truck. Business transaction 100%.

All numbers from sale contract:
New Truck Total Price- 33,482 ( includes all taxes, docs, AND INCLUDES 1,600 towards the old truck loan)
Downpayment- Trade In Value Given for old truck- 7,000. Cash paid by customer to pay off old truck loan-1,000.
Adjusted Basis of Old truck - 12,918. Loan on old truck- 9,499.
Total Amount financed for the new truck- 33,482.

Please help to calculate the adjusted basis of new truck and unrecognized loss. I am coming up with the adjusted basis of 37,901 (that includes a loss of 4,419). I am assuming we add that unrecognized loss to the basis of new truck?

[marinaavet]

I have posted another question, hoping you can help. So confusing about that transaction. Thank you.

[AtlantaTaxExpert]

You CANNOT add the cost of the old loan to the combined basis of both trucks.

Only the adjusted basis of the old truck can be added to the new truck's original cost ($33,482 MINUS the $1,600 for the old loan).

[marinaavet]

You CANNOT add the cost of the old loan to the combined basis of both trucks.

Only the adjusted basis of the old truck can be added to the new truck's original cost ($33,482 MINUS the $1,600 for the old loan).

That was my original thought too, but then the new adjusted basis : 12,918 plus 31,882? That does not seem right. The old loan balance of 9,499 that is getting paid of with this transaction is irrelevant? Don't we have to net the liabilities in like kind exchanges ?meaning deduct the liability transferred and add a new liability to the basis?

[AtlantaTaxExpert]

Loan amounts are NEVER factored into tax basis. It is a separate issue.

[marinaavet]

Loan amounts are NEVER factored into tax basis. It is a separate issue.

Ok. I am trying to understand that concept ,and I am confused as IRS states:

A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments.

1. Decrease the basis by the following amounts.
   
   
   1. Any money you receive, and
      
   2. Any loss you recognize on the exchange.
   
   
   
2. Increase the basis by the following amounts.
   
   
   1. Any additional costs you incur, and
      
   2. Any gain you recognize on the exchange.
   
   

If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange.

I got this from this link Publication 551 (07/2011), Basis of Assets

Under nontaxable exchanges. So the IRS is saying treat debt assumption as money you received?

[marinaavet]

I found a very interesting calculator of new basis and it does include the liabilities in the calculations. Based on the calculation its showing the same result I came up with- 37,901 as the new basis. Here is the link Determine New Basis in Like-Kind Exchange

What do you think?

[AtlantaTaxExpert]

What is the source of this new basis calculator?

If it is the IRS, then I will agree to it.

[talaniman]

Its from JMT Production and hasn't been updated since 2000.

Last updated: 03/14/2000
Copyright © Thompson Resources, 1996-2000, all rights reserved.

[AtlantaTaxExpert]

Okay, now that I am rested and thinking more clearly, some debts ARE considered in like kind exchanges if they are assumed from one party to the other.

[MLSNC]

ATE, I still think you are basically correct in that you do not use notes in the calculation of basis except that the IRS has to refer to it that way with regards to exchanges. It is a simpler to think of this as a sale and a purchase. First you have a sale with the sales price being the note assumed. Forget the trade-in value as that has no effect. That transaction gives you a loss on the sale of $4,419 (12,918-8,499 loan payoff after the $1,000). The loan pay-off represents the sales price, and that is the way I think of it. Now, you have to come back and record the purchase of the new truck. The cost of that was the $33,482. Again, no mention of the note even though the IRS may use it on the form. Since the loss is not allowable on the exchange, the loss account is closed and added to the basis. This results in the basis of $37,901 which is what the OP has calculated. Now you have to put that information of the proper lines of the form.
I find the tax-free exchange form to be confusing, and generally do a worksheet similar to the above before completing the form. It becomes even more complex when the exchange involves property that is not like-kind.

[AtlantaTaxExpert]

Thank you, MLSNC. Your explanation adds clarity to a confusing situation!

[marinaavet]

ATE, I still think you are basically correct in that you do not use notes in the calculation of basis except that the IRS has to refer to it that way with regards to exchanges. It is a simpler to think of this as a sale and a purchase. First you have a sale with the sales price being the note assumed. Forget the trade-in value as that has no effect. That transaction gives you a loss on the sale of $4,419 (12,918-8,499 loan payoff after the $1,000). The loan pay-off represents the sales price, and that is the way I think of it. Now, you have to come back and record the purchase of the new truck. The cost of that was the $33,482. Again, no mention of the note even though the IRS may use it on the form. Since the loss is not allowable on the exchange, the loss account is closed and added to the basis. This results in the basis of $37,901 which is what the OP has calculated. Now you have to put that information of the proper lines of the form. I find the tax-free exchange form to be confusing, and generally do a worksheet similar to the above before completing the form. It becomes even more complex when the exchange involves property that is not like-kind.

Makes sense. Thank you! So confusing like many things in taxation! I knew liabilities need to be considered in this case. I am currently studying for the last part of EA , and it basically states- The basis of property received is the adjusted basis of property given up minus any "boot" received (money or liability transferred) plus money paid or/and new liability assumed. Thus, 12,918-9,499+1,000+33,482= 37,901. After putting all these numbers into QuickBooks GJ, the actual not recognized but realized loss is 6,019. I found an interesting article about a Sec 1031 exchange and it says " An easy rule to remember is that the taxpayer's basis in the replacement property is the value of the replacement property less the amount of gain deferred in the exchange (or plus the amount of unrecognized loss)." Thus, in this case, 31882 + 6,019=37901. Now, another challenge to put all that on the form!!

I totally agree, the form looks confusing. And yes it gets more complicated when not like -kind property involved.... Another question, what happens with the depreciation in this case? The new replacement property will start its own depreciation upon the exchange, correct?

[AtlantaTaxExpert]

That answer I do know: Once the new property is purchased and the new basis is determined and in place, the depreciation cycle restarts anew.