3

For US tax resident

If car is traded in for a higher value car and the trade in value of the car is higher than the purchase price of the car, considering long term (>1yr)? Will there be any capital gains tax owed even after trading in?

For example,

A 2015 Toyota Corolla purchase in year 2017 for 13k, now trading in that car to purchase 2017 Rav4 for 25k. Trade value given by dealer is 18k (more than actual value, due to chip shortage), so the total cost after deducting trade in value would be (25-18) = 7k.

In this scenario, capital gains would be (18-13) = 5k.

Just want to know whether there is any exception for trade in.

Improve this question
1
  • 1
    Maybe it could be possible to evade this personal tax, if the car dealer would change the billing. Officially buying the old car for 13k and giving you a 5k discount on your purchase. - It shouldn't make a big difference for the car dealer, but you would have no gains to report.
    – Falco
    Dec 3, 2021 at 9:49

2 Answers 2

Reset to default
5

Yes, you would report this as a capital gain on your Schedule D. No, there is no exception because it was a trade-in. You're effectively selling your car to the dealer for 18k and purchasing another one for 25k.

Note that any money spent on permanent improvements like wheels (but not tires), stereo, paint, etc. that increased the value of the car could be deducted from the gain (technically added to the cost basis, but effectively reducing the gain). If you do include those, be sure you keep receipts in case of an audit.

Note that this answer is for general information purposes only and does not constitute professional tax advice.

Improve this answer
2

No, there is no exception for a trade-in. There are two separate transactions here: 1) selling your car for $18K and 2) purchasing the new car for $25K. Just because the dealer and you are simplifying the movement of cash as one $7K transfer, the 2 separate transactions are not collapsed to one. The car dealer's profit will still be based on having sold the car for $25K. See here for the IRS's primer on capital gains and losses. All personal use goods are eligible for capital gains tax if sold for more than what they were bought for.

EDIT: D Stanley's comments on making sure to calculate a new cost basis if applicable are very useful to consider as well

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .