Cars for business and personal use

The decision of whether to trade in an old business car or try to sell it for cash ought to hinge on factors such as the amount you can get on a sale versus a trade-in, and the time and bother a sale will entail. However, important tax factors also may affect your decision making process.

Here's an overview of the complex rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.

In general, the sale of a business asset yields a gain or loss depending on the net amount you receive from the sale as compared to your cost basis. 'Basis' is your cost for tax purposes, and if you bought the asset, it usually equals your cost less the depreciation deductions that were claimed for the asset over the years.

Under the tax-free swap rules, trading in an old business asset for a new, like kind asset doesn't result in a current gain or loss, and the new asset's basis will equal the old asset's remaining basis plus any cash you paid to trade up. The rules generally are the same for business cars, with a couple of extra twists. Here are some pointers:

As a general rule, you should trade in your old business car if you used it exclusively for business driving, and its basis has been depreciated down to zero, or is very low. The trade-in often avoids a current tax. For example, if you sell your business car for $3,000, and your basis in it is only $1,000, you will have a $2,000 taxable gain, but if you trade it in, a current tax is avoided.

True, your basis in the new car will be lower than it would be if it you bought it without a trade-in, but that doesn't necessarily mean lower depreciation deductions on the new car.

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