Need help with a 1031 exchange journal entry for a truck

My client bought a new truck this year, trading in his old truck. Old truck is fully depreciated, purchased 2005, for $25,000. New truck cost $23,000, trade in allowed on old truck is $6,000, loan for new truck is $16,000. I'm getting lost on depreciable basis for the new truck. How do I enter that on the books and in the tax program?

Anybody? Anybody?

DR Asset-Truck for $17,000. CR Note Payable Truck for $16,000. CR Cash for $1,000.

I am assuming he paid $1,000 down, as your numbers are $1,000 short.

Thanks Seaside. So even though the new truck was purchased for $23,000, the journal entry isn't going to reflect that amount, but only the actual depreciable basis, do I understand that correctly? My concern is in going forward and having paperwork in the file showing the purchase contract at $23,000, making sure it's clear somehow that a 1031 exchange has taken place. Maybe I'm overthinking it or more worried about it than I need to be. I'll probably retire in the next couple of years and I don't want to leave a problem in these books. If someone else looked over the file later on, saw the contract, didn't understand about the 1031 exchange and mentions to the client "BTW, you bought the truck for $23,000, but only depreciated $17,000....." this client would freak out.

And there is the issue with the realized gain. This has become a royal PIA for me now. I have a dangling $6,000 gain that needs to be recognized, but I don't have the other side of the transaction.

the $6000 "gain" is deferred and comes about thru the reduced depreciarion on the new truck (depreciable basis of $ 17,000 instead of $23,000.)

In your journal entry, don't forget to credit assets and debit accum depn for the first truck.

Thanks Joan, but the $6,000 is the recognized gain and is the boot received in the trade in, the deferred gain is a little over $7,000 and reduces the FMV of the new truck. That figure ties into the form 8848 (? the 1031 exchange form), so does the $6,000. I'm so frustrated with it, I'm ready to just say screw it, make the tax return right and move on.

There is no recognized gain. The gain is deferred. The realized gain would be the $6,000 that they were allowed for the trade in.

Take a look at "8824-vehicle trade" a few days ago on tax forum. It may help you!

The basis of the new truck is $17,000. On the 8824, Line e 15=$0, Line 16=$23,000 and Line 18=$17,000.

Markm - why would line 15 be zero? The client received $6,000 from the dealer for his fully depreciated old vehicle and the instructions indicate that should be entered on line 15 as cash received.

I'm re-visiting this today, and while I entered the above numbers for the purpose of understanding the journal entry, I'll provide actual numbers now, which aren't all that different, but a little. So the facts are still the same, fully depreciated older vehicle, so basis in that one is zero. Trade in on that vehicle for the new one is still $6,000. FMV/purchase price of the new vehicle is $23,609, loan to buy it is $16,093. Form 8824 is completed: Line 15 $6,000; line 16 $23,609; line 17 $29,609; line 18 $16,093; line 19 (Realized gain) $13,516; line 20 $6,000; line 21 -0-; line 22 $6,000; line 23 (Recognized gain) $6,000; line 24 (deferred gain) $7516; basis of new property $16,093. My problem is still with the journal entry to QB for the new truck.

Vehicle dr $23609; Vehicle cr 7,516 (to recognize 1031 exch deferred gain); loan payable cr -$16093; gain (recognized) $-6,000 and I'm off at this point by the dangling $6,000 recognized gain.

Sorry this is long and I appreciate any help that might be offered.

He didn't receive $6,000. No boot. You said it was a trade in allowance.

Why wouldn't the trade in allowance be considered boot? It was applied against the purchase of the vehicle which reduced the amount of the loan required. They could have just as easily written a check to the client, in which case that would be considered boot. It is the recognized gain.

Why wouldn't the trade in allowance be considered boot? It was applied against the purchase of the vehicle which reduced the amount of the loan required. They could have just as easily written a check to the client, in which case that would be considered boot. It is the recognized gain.

You sir are over thinking this.... there is no boot here.

Its the reason he didnt "SELL" the truck for $6,000. If he did, there would be gain. He didnt, basis reduced.

"Line 15. Include on line 15 the sum of:
Any cash paid to you by the other party,
The FMV of other (not like-kind)
property you received, if any, "

The above is taken from the instructions for Form 8824. I'm not clear why Southpark and SJR don't consider that the $6,000 doesn't fit this description. Sorry to be so dense on this issue, but, if the $6,000 is included on 8824, line 15, it moves over to gain on sale, He may not have technically "sold" the truck as if he gave it to me or to you, but he does have an economic advantage because of it. What would it be called if not boot?

He exchanged a truck for a truck. Isn't that like-kind?

The above is taken from the instructions for Form 8824. I'm not clear why Southpark and SJR don't consider that the $6,000 doesn't fit this description. Sorry to be so dense on this issue, but, if the $6,000 is included on 8824, line 15, it moves over to gain on sale, He may not have technically "sold" the truck as if he gave it to me or to you, but he does have an economic advantage because of it. What would it be called if not boot?

Boot is only cash received at the end of the deal. The seller simply felt that the vehicle was worth $6,000 and agreed to accept the vehicle in lieu of $6,000 in cash.

Did your client get a check for $6,000? Did your client get a stack of banknotes that he could throw up in the air if he wanted to? No, he didn't. He didn't have cash paid to him, so line 15 is zero.

Action, look at it like this. If he sold the vehicle, the entry would be this:
DR Vehicle $23,609
CR Note Payable $16,093
CR Cash $1,516
CR Gain on Sale $6,000.

However, since the vehicle was not sold, it was traded in, he now defers recognizing the $6,000 gain, as the gain is rolled over into the cost of the vehicle. Therefore, you need another entry as follows:
DR Gain on Sale $6,000
CR Vehicle $6,000.

So the cost of the vehicle on the books will be $17,609, and no gain is recognized because it was a like-kind exchange.

or, back to Tax 101 - It is a realized gain but not a recognized gain.