How do I report income from a car I traded in?

[soulwinner10]

Hello,

I traded my car in at a dealership upon purchase of a new vehicle and received $1,500 check for my trade in. How do I report it for tax purposes?

Also, after I purchased the new vehicle the dealership sent me a check for $1,000 because there was some unreported damage. How do I report that?

Thank You.

[DoninGA]

If you sold your personal property, the vehicle, for less than what you paid for it originally, the loss on the sale of personal property is not reported on a tax return.

The funds you received for the damage to the new car are is your own money being returned to you.  That is not taxable income so is not reported on a tax return.

The above assumes that the vehicles were not being used in a business but were for personal use only.

[Vanessa A]

These are generally not taxable transactions if you were not a business, you would not report it on your return, unless, your basis in the car you traded in was more than your trade in amount plus the check you received.  Ex.  If you paid $10,000 for your car that you traded in and the vehicle you bought sold for $15,000 then you also received an additional $1,500, then you would have sold your car for $16,500 so you would then need to report the $6,500 as income.  To do this you will select

• Federal
• Income
• Show More next to Investment Income
• Start next to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B) 
• Select Other
• Continue through and select Other again for the type of investment
• Answer how you obtained the items you sold
• You will need to enter the selling price, dates and the cost basis of the car

If you paid $10,000 for the car and the amount you were given was only $1,500, there would be nothing to report on your return unless this was a vehicle used for business.

If this was a vehicle used for business, then you would need to go through your business return and when you get to the vehicle section, you will say that you sold or disposed of the vehicle in 2023.  Continue through and answer the questions regarding when you sold it, how much you sold it for.

Your new vehicle (IF only used for personal reasons) is not included on your return

If you use the new vehicle for business, then you would click start next to vehicle expense and then Add a vehicle if you already had your other vehicle listed.  Then walk through the steps to report your vehicle expenses.  It will first ask for mileage, then you can select I would like to enter my actual expenses.  Here you will be able to see if your vehicle is eligible for full depreciation for 2023.  

Business Use of Vehicle

Capital Assets personal use

[soulwinner10]

Thanks for your reply. Yes, it was my personal car, not for business. To be clear though, I purchased the car in 2016 for $1,504.21 and received $1,500.00 in 2023 (sold to dealership). It is not much of a loss ($4.21).

To confirm, your saying because it was for personal use and not business this is why it doesn't need to be reported....correct? I just figured because it is a loss that it would be.

Would you also please explain how the $1,000 I received on damage to the new vehicle is my own money being returned to me? I'm trying to make sense of it.

Thank You.

[TomK2023 · Accepted solution]

The IRS won't let you deduct losses on personal items.

As for the returned money ($1,000) from the car dealership, you can think of as getting a discount off of the original purchase price because they overcharged you (due to undisclosed damage to you at the time of the sale).

For example, say you bought your new car for $10,000 (your agreed upon purchase price).  The dealership said it was worth $10,000.  However, they later realized that they forgot to tell you about some damage.  

Had you known about the damage at the time you bought it, the value of the car would have been lower, say only $9,000. They probably picked that $1,000 refund amount to you as gesture of good will, so you wouldn't think they had cheated you (when you might have found out about that damage in the future).

Thus, you should have only paid $9,000 originally; that $1,000 is a return of your money.

[Opus 17]

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@soulwinner10 wrote:

Thanks for your reply. Yes, it was my personal car, not for business. To be clear though, I purchased the car in 2016 for $1,504.21 and received $1,500.00 in 2023 (sold to dealership). It is not much of a loss ($4.21).

To confirm, your saying because it was for personal use and not business this is why it doesn't need to be reported....correct? I just figured because it is a loss that it would be.

Would you also please explain how the $1,000 I received on damage to the new vehicle is my own money being returned to me? I'm trying to make sense of it.

Thank You.

---

This is considered a capital gains/loss transaction.  You have a gain when you sell an item for more than you paid, and a loss if you sell an item for less than you paid.  For personal property, losses are not deductible, but gains are taxable.  It's pretty remarkable that you could buy a used car in 2016 for $1500 and sell it in 2023 for $1500 (sounds like my son in law, actually), but you would only report the sale if you sold the car for more than you paid, and then only the gain (the difference) is taxable, not the proceeds.  Since you sold at a small loss, the loss is not deductible or reportable.

The $1000 returned to you is essentially a discount on the purchase price, and discounts are not taxable income.  It does reduce your cost basis (your purchase price) that you will use to calculate your gains or losses if you sell the car in the future.

[soulwinner10]

Wow! Thank you TOMK2023. This was very helpful. Great explanation!

[soulwinner10]

Thank you OPUS 17. This makes much sense.