Do I pay taxes on Surplus Check from Dealership?

[888888884]

Hi. My car was repossessed last year. I had a remaining $17,000 to pay. Once the dealership sold the car, they sent me a $10,000 check. I want to know do I pay taxes for this $10,000? 

[DianeW777]

It depends.  If the car was originally purchased for a higher amount than the $10,000, and it was not used for any type of business,  then you may have a personal loss which is not required to be reported. If I understand your situation, the car was sold for more than enough to pay it off and you were paid the difference.

However, if this was reported to you on Form 1099-MISC, or 1099-C, then it means you were forgiven a debt and this is taxable income to you.

• How do I report Form 1099-C?
• Where do I report Form 1099-MISC? (pay close attention to the instruction)

If you used this car for a business you own, then you would report the sale of business property, and could have a gain depending on whether you deducted expenses for your car on your business return.

[Opus 17]

You would treat this as an ordinary sale of property, where you sold the car apparently for $27,000.  You have a taxable gain if you received more than your adjusted cost basis.   For personal property, your adjusted cost basis is what you originally paid (including sales tax).  If the car was used partly for business, your cost basis is reduced by the business use and that has to be taken into account.

[888888884]

Would that be my profitable gain or the dealerships? Because technically they sold the car. Yes, I used it partially for business. 

[888888884]

• Yes the car was originally $28,000 plus taxes. I had already paid 12k. And yes, your understanding on my situation is valid. I used the car partially for business but not every often. The revenue incurred was less than $2000.

However, I never received a tax form from the dealership like I thought I would. Should I reach out to them before filing my taxes or just not include it at all? Thanks.

[DianeW777]

No it's not necessary to reach out to the dealership, however you could have a taxable gain or loss on the business use portion of the vehicle.  The worksheet in IRS Publication 4681 (page 13) will help you figure out if you had a gain on the repossession.

The business use of the car was either standard mileage rate (SMR) or actual depreciation expense.  The business use percentage of the car is business miles divided by total miles on the vehicle from the beginning to the date of repossession.

1. The SMR has a depreciation component for each business mile (see the chart to calculate this amount).
2. If actual depreciation was used, see your tax return for the amount of depreciation expense claimed for business on this vehicle.

Once you have the cost basis, depreciation and sales price you will enter a Sale of Business Property in your tax return.

1. Wages & Income at the top
2. Scroll down to Other Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter as description 'Inherited Rental'
7. Enter a date that will be more than one year before the sales date for the date acquired 

Note: If your car is part of your tax return you should select 'Sold, disposed of, etc....' then do not indicate it was sold.  You must say 'Yes' it was converted to personal use.  This will eliminate any sales information in the vehicle it self since you will report that as indicated in the instructions above.

                    

@Cheyenna08 

[Opus 17]

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@888888884 wrote:

Would that be my profitable gain or the dealerships? Because technically they sold the car. Yes, I used it partially for business. 

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If the dealership returned $10,000 plus canceling a $17,000 loan, that is the same as you selling a used car to the dealership for $27,000.   The fact that they then sold it on to someone else is irrelevant to your tax position.

Because you had some business use, you must recapture (pay back) the depreciation you claimed.  There was a depreciation allowance in the standard mileage rate, or you claimed actual depreciation based on your actual mileage.  You need to know the mileage you claimed for business use of this car from when you bought it until it was repossessed, and Turbotax should be able to figure out how much of that $27,000 is a taxable recapture.