In the past (before 2018), when you traded vehicles, you pushed your old business basis to the replacement vehicle under the old Section 1031 tax-deferred exchange rules. (But remember, this rule doesn’t apply any longer to Section 1031 exchanges of vehicles or other personal property occurring after December 31, 2017.)
Regardless of whether you used IRS mileage rates or the actual-expense method for deducting your business vehicles, you could find a big deduction available to you.
Take a look and see how Sam finds a $27,000 tax-loss deduction on his existing business car. Sam has been in business for 11 years, during which he:
1.) Converted his original personal car to business use.
2.) Then traded in the converted car for a new business car (car 2).
3.) Then traded in car 2 for a replacement business car (car 3).
4.) Then traded in car 3 for another replacement business car (car 4), which he is driving today.
During the 11 years Sam has been in business, he has owned four cars. Further, he deducted each of his cars using IRS standard mileage rates.
If Sam sells his mileage-rate car today, he realizes a tax loss of $27,000. The loss is the accumulation of 11 years of car activity, during which Sam never cashed out because he always traded cars before he knew anything about gain or loss. Further, Sam thought his use of IRS mileage rates was the end of it—no. more worries (this is incorrect thinking as well).
Because the trades occurred before 2018, they were Section 1031 exchanges and so deferred the tax results to the next vehicle. IRS mileage rates contain a depreciation component of which Sam was unaware. That’s one possible reason Sam unknowingly accumulated his big deduction.
To get a mental picture of how this one sale produces a cash cow, consider this: when Sam sells car 4, he is really selling four cars—because the old Section 1031 exchange rules added the old basis of each vehicle to the replacement vehicle’s basis.
Examine your car for this possible loss deduction. Have you been trading business cars? If so, your tax loss deduction could be big!