Disposition of a Car

If you dispose of your car, you may have a taxable gain or a deductible loss. The portion of any gain that is due to depreciation (including any section 179 or clean-fuel vehicle deduction) that you claimed on the car will be treated as ordinary income. However, you may not have to recognize a gain or loss if you dispose of the car because of a casualty, theft, or trade-in.

This section gives some general information about dispositions of cars. For information on how to report the disposition of your car, see Publication 544.

Casualty or theft. For a casualty or theft, a gain results when you receive insurance or other reimbursement that is more than your adjusted basis in your car. If you then spend all of the proceeds to acquire replacement property (a new car or repairs to the old car) within a specified period of time, you do not recognize any gain. Your basis in the replacement property is its cost minus any gain that is not recognized. See Publication 547 for more information.

Trade-in. When you trade in an old car for a new one, the transaction is considered a like-kind exchange. Generally, no gain or loss is recognized. (For exceptions, see chapter 1 of Publication 544.) In a trade-in situation, your basis in the new property is generally your adjusted basis in the old property plus any additional amount you pay. (See Unadjusted basis, earlier.)

Depreciation adjustment when you used the standard mileage rate. If you used the standard mileage rate for the business use of your car, depreciation was included in that rate. The rate of depreciation that was allowed in the standard mileage rate is shown in the chart that follows. You must reduce your basis in your car (but not below zero) by the amount of this depreciation.

These rates do not apply for any year in which the actual expenses method was used.

For tax years after 1989, the depreciation rates apply to all business miles. For tax years before 1990, the depreciation rates apply to the first 15,000 miles.

Example. In 1996, you bought a car for exclusive use in your business. The car cost $14,000. From 1996 through 2001, you used the standard mileage rate to figure your car expense deduction. You drove your car 14,100 miles in 1996, 16,300 miles in 1997, 15,600 miles in 1998, 16,700 miles in 1999, 15,100 miles in 2000, and 14,900 miles in 2001. Your depreciation is figured as follows.

At the end of 2001, your adjusted basis in the car is $2,127 ($14,000 - $11,873).

Depreciation deduction for the year of disposition. If you deduct actual car expenses and you dispose of your car before the end of its recovery period, you are allowed a reduced depreciation deduction for the year of disposition.

To figure the reduced depreciation deduction for a car disposed of in 2001, first determine the depreciation deduction for the full year using Table 3.

If you used a Date Placed in Service line for Jan. 1--Sept. 30, you can deduct one-half of the depreciation amount figured for the full year. Figure your depreciation deduction for the full year using the rules explained in this chapter and deduct 50% of that amount with your other actual car expenses.

If you used a Date Placed in Service line for Oct. 1--Dec. 31, you can deduct a percentage of the depreciation amount figured for the full year. The percentage you use is determined by the month you disposed of the car. Figure your depreciation deduction for the full year using the rules explained in this chapter and multiply the result by the percentage from the following table for the month that you disposed of the car.

Do not use this table if you are a fiscal year filer. See Sale or Disposition Before the Recovery Period Ends in chapter 3 of Publication 946.