@Devonn216 wrote:
I poked through this thread, but I don’t see incidentals addressed. In my situation, I have two options: 1) buyback or 2) replacement. Under both options I will be getting $27,000 for my out of pocket expenses (hotel bills, rental cars, and meals from various breakdowns; aftermarket parts that will stay in the vehicle when turned in).
Under the buyback option I would get $66,000 (purchase price with all fees) + $27,000 for the aforementioned expenses = $93,000. Will this be taxed?
Under the replacement option, I will get a brand new replacement vehicle + the $27,000 for the out of pocket expenses. It is likely that the MSRP will not be an exact match to my original vehicle. Will I have to pay tax on the MSRP difference and the $27,000?
thank you!
Yes, the $27,000 is ordinary taxable income. There's nothing you can deduct it from. (And even if this was a business vehicle, that would be taxable income since it would represent a reimbursement of a previous tax deduction.)
Yes, the MSRP difference is also taxable.
What I would do is report the sale of the car as sale of an asset, with a purchase price of $66K and a selling price of $99K (or whatever it was). That will treat the difference as a capital gain, rather than ordinary income, so if you owned the car more than 1 year, it will be taxed at a lower rate than ordinary income.
