@schmange21 wrote:
Hi, I have been told by someone who also had a lemon lawsuit that you can deduct the interest from the new car bought due to surrendering your other car. Is that true?
1099-MISC $74,000
original lemon car cost - $58,000
Interest on new car financed also a write off?
Sorry. Interest on personal loans is never tax deductible. And whatever you did with the settlement (buy a new car, take a vacation, etc.) has nothing to do with the taxability of the settlement.
The settlement is taxable if it is more than the adjusted cost basis of the vehicle. The adjusted cost basis is generally the price you paid. You can include the sales tax, and you can include any legal fees that you would have had to pay even if you bought the car for cash (like a fee to register the car and get a license plate, a DMV safety inspection sticker, and so on.) Fees associated with borrowing money to buy the car are not adjustments to the basis.
Other adjustments to the basis would be improvements that increase your property’s value or useful life, or that adapt it to new uses. Paying for tinted glass, or accessibility conversion, or probably even under-car rust treatment, would count. Unfortunately, repairs to restore the car to as--was condition are not adjustments to basis.
If you held the car more than one year, you can report this as a capital gains transaction, where you sold the car back to the manufacturer for the settlement amount. Capital gains are taxed at a lower rate than ordinary income.
