Trade in of vehicle

[jgcpa]

My client received a Truck distribution from his S corp. I recorded the property distribution on the K-1 and the deemed sale at FMV. The truck is fully depreciated. The Kelly Blue Book value is $9500. On the same day as the distribution, the shareholder traded in the Truck to purchase a Toyota. The Retail Sales Contract at Toyota shows the trade-in at $13500. The client says the Trade-in value is inflated because they negotiated dealer fees and the dealer increased the trade in to reduce the final cost. Do I need to show the Trade in (Sale) of the Truck to Toyota for $13500 with basis of $9500 on the personal Form 8949? Or, not show the sale at all, and assume the Truck was sold to Toyota for the Kelly Blue book value?  I have heard that dealers play with numbers and the Trade in value can be manipulated to "make the sale."

[TaxGuyBill]

If your client's negotiation resulted in him getting $13,500, that is how much the vehicle was sold for.  That extra $4000 needs to go somewhere - either as the FMV distributed to him or on 8949/Schedule D with a gain.

It seems like your client should have negotiated things differently.

[jgcpa]

Thank you. Currently, I have the $4000 going to the Form 8949 Sch D. (1040)

[IRonMaN]

I normally tend to agree with Bill but based on the facts presented, I would hold off on my judgement for now.  If you properly valued the vehicle using a reliable source for valuations, I wouldn't be so quick to have your client pay some additional tax.  I know that I used to deal with a car dealership that used to never show a discount on the purchase of a new vehicle, but they used to inflate the value of the trade to net out to the same place.  So the moral of the story is, that trade in value may or may not represent the true value of the vehicle.

[qbteachmt]

While I agree with this part: "that trade in value may or may not represent the true value of the vehicle."

I would point out this description: "a Truck distribution from his S corp"

In other words, did he get to decide the FMV from the S Corp to himself? And then he gets a higher value on trade in?

"The Kelly Blue Book value is $9500"

Trade in or Private Sale?

"The Fair Market Range for used cars is Kelley Blue Book’s estimate of what a consumer can reasonably expect to pay this week in their area for this year, make and model used vehicle with typical miles and options (or with the miles and options they specify), excluding taxes, title and fees, when buying from a dealer. Each dealer sets and controls its own pricing."

I look at this type of activity as similar to the basis in an inherited asset. If you inherit something and sell right away, you just established its FMV. I would point out that KBB specifically warns you that local area or regional markets and other conditions can affect the value of any vehicle.

[jgcpa]

Thank you so much for all your views. This has really opened my mind to different interpretations of Trade-in allowance. I read an article from Masterselling.com that a trade-in allowance which is more than the Actual Cash value of the vehicle is an over allowance, which translates into a discount from the selling price. 

If I accept that this overage above the Kelly Blue book is truly a discount from the selling price, then I am leaning on not reporting the $4000 as a personal capital gain, because the dealer has actually not bought the vehicle for the $13500, but has reduced the selling price by the excess of trade-in allowance over KBB. 

[George4Tacks]

How would an auditor "interpret" the paperwork presented at an audit? 

[IRonMaN]

Not to downplay things, but when was the last time you had an IRS auditor review the purchase of a personal vehicle?

[George4Tacks]

Ummmmm?  I think it was like NEVER, but still we are supposed to at least pretend we are on the side of good vs evil. 

[IRonMaN]

We can always pretend 😜

[jgcpa]

Regarding the paperwork, the client has a Buyer agreement that says Discount or Allowance of $13500.(no mention of Trade-in.) which is initialed by the client. The dealer and client has the Retail Installment Agreement that says Trade-in for $13500 which is not signed by the client.

The client also provided me the Kelly Blue book estimate of $9500.00

I presume the client would present the signed paperwork which does not say trade-in.