Is my lemon law settlement on my car taxable?

[moonSB]

I'm wondering whether any part of the settlement I receive on my car that is being handled sort of as lemon law by the manufacturer.

I get to keep the car.

$30,000 My purchase price (I bought it used)

$20,000 Current value - IF it was in good condition

$15,000 Approximate current value because there are lots of problems

$10,000 settlement offered by manufacturer (and I get to keep the car)

I deduct 50% as business use of the car on my tax return

1) If it is taxable, how much would be taxable?

2) And would I pay tax this year, or would I wait until I sell the car to see what it sells for at that time?

[Anonymous · Accepted solution]

don't think TT can handle a situation like yours.    how i would handle it is to reduce the gross basis of the vehicle from $30,000 to $20,000  ie what you received under the lemon law.   so if you took more than $10,000 in depreciation, based on 50% usage, for tax purposes any excess would be income and there would be no further depreciation on the vehicle.   

[moonSB]

Thanks @Anonymous 

Would the 50% personal use be taxable - let's say I sold it for $22,000. Would I pay tax on the $2,000 that is above the $20,000 adjusted basis?

I worry about the IRS seeing I received $10,000 and not declaring it as income anywhere. I guess I just have to explain I reduced the basis of the car if they audit me?

[Anonymous]

your adjusted basis is $20,000   ,     $10,000 personal, $10,000 business    there is no depreciation on the personal portion.   if sold the sales proceeds would be allocated 50/50. (assuming the 50% business use holds until sold)   so if you sold for $20,000,   you would have 0 personal gain (personal losses are not deductible) and if your vehicle is fully depreciated you would have $10,000 of depreciation recapture.   fully depreciated and sell for $10,000 you would have a non deductible personal loss of $5,000 and $5,000 of depreciation recapture.       i don't know if the proceeds you'll receive on the lemon law settlement will be reported to the iRS.