 Selling
an SUV expensed under Section 179
|
 Dear
Tax Talk,
I purchased a Lincoln Navigator, in December 2003, and took full
deduction in 2003.
How long am I required to keep the vehicle, and what
is the penalty (if any) if I sell it after two years of ownership?
Thanks.
-- Ken P.
 Dear
Ken,
After being penalized at the pump, you must be
ready for a hybrid. When you use your car in business, it is subject
to an allowance for depreciation and an additional deduction for
Section 179 expense.
Section 179 allows you to write
off the cost of certain assets acquired for business use. A few
years ago it allowed a full deduction for the cost of certain heavy
sport utility vehicles. This loophole was somewhat trimmed back
in 2004 as I discussed in an earlier
article.
When you write off the cost of
assets, your basis is zero. If you sell the vehicle, the difference
between the selling price and its basis is gain. This gain is recognized
as ordinary income to the extent of the depreciation or Section
179 expense you previously claimed.
However, if you trade the vehicle for another, you
are entering into a like-kind exchange. Just like real property
like-kind exchanges, you are allowed to defer the gain by reducing
the depreciable basis of the replacement vehicle.
Since the replacement vehicle will be subject to the
current depreciation limits, it's not necessarily eliminating future
tax benefits because you might not be able to fully write off the
cost of the new car during its useful life. For example, if the
Navigator was worth $20,000 and was traded for a car costing $50,000,
your cost for depreciation in the replacement vehicle would be $30,000.
You'll get the same amount of depreciation allowance in 2005 on
the $30,000 cost as you would on the $50,000 cost since depreciation
is capped around $7,000 per year on a car, regardless of its cost.
If
you transfer the Lincoln to personal use, you would realize income based on the
difference between its value and its basis. And you would still have the burden
at the pump. | 
