This is a question we frequently encounter when deciding what to do with the old car when buying a new one. If your car is not used for business, there are two basic considerations that will affect your decision:

(1) The financial benefit of selling it as opposed to trading it in.
(2) The time and energy it will take to sell the vehicle on your own.

If the vehicle will be used for business purposes, there is a third and very important consideration that relates to taxes. If you trade in the vehicle for a new one, no tax gain or loss is realized in the transaction. Instead, the tax basis of the new vehicle is simply adjusted to account for the gain or loss from the business vehicle.

However, if you sell the vehicle, you will have a reportable gain or loss. This is best understood by example. Let’s say you purchased a vehicle three years ago for $15,000. The vehicle was used 100% for business, and over those three years, you took a depreciation tax write-off of $6,500. The vehicle is then sold for $6,000. Your tax basis in the vehicle is $8,500 (the purchase cost less the depreciation). The result is a $2,500 tax loss (sales price minus basis). Had you traded the vehicle in, you would not have realized that loss, because it would have been rolled into the tax basis of the replacement vehicle. Therefore, for tax purposes, it is better to sell a vehicle if the sale will result in a loss and to trade it in if a sale will result in a gain.

If the vehicle is partially used for business, you will need to prorate the potential gain or loss based on business use. If the standard mileage rate was used for reporting business vehicle expenses, then an allowance for depreciation is included in the mileage rate:

• 17 cents for every business mile traveled during 2005 and 2006;
• 16 cents for every business mile traveled during 2003 and 2004;
• 15 cents for every business mile traveled during 2001 and 2002;
• 14 cents for every business mile traveled during 2000;
• 12 cents for every business mile traveled from 1996 to 1999.

This may be quite complicated, so please give us a call before you sell or trade in your business car, or if you decide to lease a vehicle instead. We can discuss all your options.