I sold a car used in rental property, please explain tax implications, and how I enter the sale in Trutbotax Online.

[mnalep]

I bought the car in 2010 for $2500.

I sold it March 29, 2023 for $400. (junkyard sale).

I have $1600 in depreciation 2010 to 2023 (based on depreciation portion of standard mileage deduction).

I used the vehicle about 20% for my rental property (on average). So, 80% of usage (on average) is personal use.

Is my 'cost basis' 20% of $2500? (ie: $500 ?)

Is my 'sale price basis' 20% of 400? (ie: $100 ?)

Do I subtract my cost basis from (selling price + depreciation) to arrive at gain or loss? (500 - (100 + 1600) ) ?

Do I have a income gain, or loss, for tax reporting? (Is it  -$1200  loss, or gain?)

I think if i understand WHY I am doing all these calculations, it would help me understand the TT forms. Thanks!

2 seconds ago

[AmyC · Accepted solution]

Putting it all together, your car  has a basis of zero and sold for $100. You have a $100 gain. Here is how:

Purchase:  Business part of car would be 20% of original cost =$500 

Depreciation: $500  

depreciation taken for business use $1600 = business use depreciation using standard mileage is limited to zero and does not go negative per IRS Publication 463 (Page 35) Car Expenses:

You must reduce your basis in your car (but not below zero) by the amount of this depreciation. If your basis is reduced to zero (but not below zero) through the use of the standard mileage rate, and you continue to use your car for business, no adjustment (reduction) to the standard mileage rate is necessary. Use the full standard mileage rate (65.5 cents ($0.655) per mile from January 1–December 31 for 2023) for business miles driven.

Sale: sold car  for $400  times 20% is $100 sales price

[mnalep]

AmyC

OK, thanks for your reply (twice 🙂 )

Now, how do I use Turbotax (I am using online version) to enter all this information correctly?

I was trying to complete this in the VEHICLE section. (under rental income section IIRC). Is that the correct place? (The images I posted is the FORM 4797 generated by my entries in the vehicle section

(anyways, in the turbotax section on vehicle used in rental, I somehow managed to get TT to generate this FORM 4797, which is close to what you described - a $100 gain - but where did the $10 come from on line 21?)

Someone else said use another section of turbotax?

Can you stick with me through this please? I've been talking to several people, and working all week on this one issue. I'd like to complete this last thing tdao and file my taxes!

[mnalep]

oops, The images I thought were included are not...

anyways, in the turbotax section on vehicle used in rental, I somehow managed to get TT to generate this FORM 4797, which is close to what you described - a $100 gain - but where did the $10 come feom on line 21?

[KrisD15]

It looks like the program is picking up an additional $10 depreciation.

Did you mistakenly enter 10 as previous depreciation taken when you were entering 100 as sale proceeds? 

[mnalep]

I entered $100 for sales price

[AmyC]

Line 21 comes from  Disposition Worksheets, Car and Truck Expenses Worksheets, Asset Entry Worksheets, K-1 Worksheets for Partnerships and S Corporations or Vehicle Expenses Worksheets.
Maybe you have an expense or carryover or random entry in one of those worksheets. 

[mnalep]

Here are the worksheets for schedule E, for my depreciated vehicle. I see the $10 showing up first on line 1 columns e and f. Then $10 appears again on lines 51,52, and 75.

(I also just noticed an entry of $7 on line 36 - which I did not enter anywhere either)

[mnalep]

So I started looking at every WORKSHEET, and i think I found where the $10 depreciation is coming from - a STATE DEPRECIATION on line 82k of 10 of what Turbotax is calling the FEDERAL WORKSHEET (see below). I don't see that in any of the Inteview question I fill in - so I suppose I will just trust that it is ok per Turbotax software.

So, based on what you've seen, is it OK to leave the vehicle information as is (it looks correct), and file my taxes?

[AmyC]

Your federal Lines 51 is the problem and carries to the state. The description for line 51 and 52: 

Depreciation allowed or allowable
If you used the standard mileage method for any or all years you must compute the depreciation portion of the standard mileage deduction as explained in Standard Mileage Rate and post the amount in lines 51 and 52 (unless you've already entered those amounts in the prior depreciation fields in the Depreciation Information section). However, do not enter an amount greater than the depreciable basis of the vehicle.

Do this: 

Enter the basis as a number and the depreciation allowed as the same number and your line 51 will be the depreciation and zero out the car.

You might need to do this:

All of the vehicle depreciation in there is not needed. Please mark no to actual and delete any forms not needed. The program will not delete a form that it thinks is important. If you are using:

• Online: see How do I view and delete forms in TTO?
•  Desktop: If you are working in the cd/download TurboTax program:
  1. On the top right, there is a FORMS button. 
  2. Click on FORMS.
  3. Locate the form you want to delete.
  4. Click on the form name.
  5. Below the form, bottom left, select DELETE FORM button. 

Bottom line, $10 of income change will not have a big tax liability impact and will not be a source of trouble, so yes, you can file your return if this is the only issue.

[mnalep]

thanks for replying, As you stated, I am not concerned about the tax implications of that extra $10. I just want my taxes to be correct, and accepted. As you put it, I want to avoid trouble.

You looked over the worksheets, so if you think I've correctly entered the vehicle info I think I will go ahead and file. Just want to get it done! Lol.

I just wanted to make sure that I was handling the sale properly, And it seems I am, as I only got $400 from the junkyard, and used 25% business usage to arrive at a $100 gain ($400 x 0.25 = $100). So I pay tax on that $100. That all makes sense - right? (And it does not matter that I depreciated the car by $1300 over it's life - right?)

Thanks

[DianeW777]

You can go ahead and file.  Gain is taxable at your regular rate of tax up to the amount of depreciation claimed or the actual gain on the transaction. In the end you only pay tax on the gain you actually received on the sale of your vehicle used in your rental.  Your calculations look correct based on the business use percentage.

@mnalep 

[mnalep]

DianneW777, Thanks for your reply.

Can you just clarify some of the terminology you just used in your response, please?

When you say "Gain is taxable at your regular rate of tax up to the amount of depreciation claimed or the actual gain on the transaction."  - that confuses me.

I had $1393 depreciation, so, are you saying that all of any gain amount, that is under $1393, is taxable?

Also, when you say gain is taxable on any actual gain - by actual gain do you mean the $100 (25% of the $400 sales price)? Because, I could see calling the $400 the actual gain also! But, I think you mean the actual gain that is derived by multiplying business 25% usage of the sales price of $400 = $100?

You also said "In the end you only pay tax on the gain you actually received on the sale of your vehicle used in your rental.  Your calculations look correct based on the business use percentage." Why is their a 'gain' under tax rules?  I mean I purchased the car for $2500, and sold it for $400. Why is their any gain? I assume it is related to depreciation, but I am having trouble wrapping my head around it. Thanks!

[DianeW777 · Accepted solution]

For the gain, in other words the IRS is not going to tax you on gain you didn't actually get.  For this reason you are taxed only on the actual gain and in your case it is below the total amount of depreciation expense claimed so it will be taxed at your ordinary income tax rates.

Only the business use portion of the gain is taxable.  It is assumed the personal uses portion of the vehicle will result in a loss which is never deductible.  However, if the personal use portion actually resulted in a gain that is always going to be taxable under the tax law.

Yes, you use the business use percentage to arrive at the business use sales price, cost basis and then the depreciation you actually used during the business use. (Sales Price x business percentage - (Cost less depreciation) equals gain).  If the gain is less than the total depreciation used, it receives ordinary tax treatment.

Cost $2500 x 25% business use cost basis = $625

Depreciation used for rental = $1393 Based on the business miles and standard mileage rate.

Business Cost - $625 minus $1393 depreciation = ($768) below zero at this point so any money received for the business use percentage in a sale is taxable income.

Sales price $400 x .25 = $100 equals taxable gain. 

Personal portion: $1875 cost - sales price of $$300 = zero because a personal loss is not allowed under the tax law.

@mnalep 

[mnalep]

Thank you, I think maybe I finally understand how the math, and the logic, works for selling the car used in rental activity.

Basically, since I used the car for business, and personal needs, I have to allocate the purchase price as to how much did i pay for the car for personal use, vs how much did I pay for the car for business use. In my case I bought the car for $2,500, and since i used it 25% for business, the IRS views that purchase as being $1875 for personal use (2500 x 75%), and $625 for business use (2500 x 25%).

I took $1393 in depreciation, which reduced my income and taxes. Then, when I sell the vehicle, the business purchase cost of $625 is compared against the tax benefit I already received - which was $1393 (depreciation). Then, since my benefit of $1393 depreciation is more than my business cost $625 - I have a gain -that must be calculated. I sold the car for $400 - but that gain is limited to 25% of that $400, since the car was only used 25% of the time for my rental, so I have a $100 gain (25% of $400). 

Is my explanation here correct?