J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

43.9 Trade-in of Business Vehicle

No gain or loss is recognized when you trade in your old car, truck, or van for a new one where you opt to treat the disposition as tax free (different rules apply if you do not make this election, as explained in IRS Publication 946). However, the trade-in affects the basis of the new vehicle for purposes of depreciation. The basis adjustment depends on whether the car you traded in was used solely or partially for business.

Old vehicle used entirely for business.

The basis of the new vehicle acquired in the trade-in is the adjusted basis of the old vehicle (its cost reduced by depreciation deductions), plus any cash you had to pay.

EXAMPLE

You trade in your 2006 car used exclusively for business to acquire a new car this year that costs $20,000. The adjusted basis of the 2006 car is $3,000 and you pay $17,000 cash. Your basis in the new car is $20,000 ($3,000 adjusted basis of the trade-in car plus $17,000 cash).

If you claimed first-year expensing, or bonus depreciation, you must make additional adjustments to basis (see IRS Publication 463).

Old vehicle used partially for business.

There is a special “trade-in adjustment” for cars, trucks, or vans used for both personal and business use. This adjustment reduces the basis of the new vehicle (but not below zero) by the amount of depreciation you would have claimed if you had used the old vehicle entirely for business. To figure the basis of the new vehicle, including the trade-in adjustment, ...