Like this:
The New Law & Trade-In Vehicles after 2017
Unfortunately, the new tax law eliminates Section 1030 tax-free exchanges for all personal property, including vehicles. Tax free exchanges are still allowed for real property. The prohibition took effect on January 1, 2018.
This means that you may no longer treat the trade-in of a business vehicle as a non-taxable event. Instead, when you trade-in an old vehicle for a new one, you must pay income tax on your gain, if any.
To the extent your gain is due to the depreciation deductions you took on the vehicle in prior year, you pay tax at ordinary income tax rates, not usually lower capital gains rates. The good news is that you don’t have to pay self-employment tax on such gains.
Example: Assume that Brenda [from another example] trades-in her old pick-up in 2018 for a new one with a $50,000 sticker price. The dealer pays her $26,000 for her old pick-up and she pays $24,000 cash. Her new pick-up has a tax basis of $50,000 which she can depreciate.
The sale of her old pick-up results in a $26,000 gain ($26,000 – $0 basis = $26,000 gain). She reports this gain on IRS Form 4797 and pays income tax on it at her ordinarily [sic] 2018 income tax rates, not capital gains rates. However, she need not pay self-employment tax on the gain.
Should that "1030" in the first line be "1031"?
Does the **sticker price** of $50,000 in the example **really** drive the FMV of the new vehicle **and** the taxation of the gain recognized on the [now] taxable exchange of the old one? Will we tax professionals sit still for that?? That result is just a little bit outrageous, isn't it? "Sticker Price" = M.S.R.P. = "Most Suckers Ready [to] Pay" = Flexible at least, Manipulable at best.
[Many thanks to Stephen Fishman and MileIQ for letting us borrow part of their article.]