Is extended car warranty buyout taxable?

[User50234]

I own a Jeep Grand Cherokee for which I purchased extended warranty from Chrysler (unlimited years/mileage). Paid about $2,000 for it at the time.

Car is now 10+ years old and the warranty paid for itself several times in covered repairs.

One of the ways warranty can end per their rules is when cost of a repair exceeds the current cost of the vehicle.

My service advisor called me and let me know that Chrysler wants to buy me out since they paid out $3,000 just for the last repair. They are offering $9,400 and I get to keep the car. Yes, sounds crazy but they figured they lost enough money on me 🙂

Are these $9,400 taxable income? If so - can I deduct the amount I paid for the warranty?

[Opus 17 · Accepted solution]

Selling property is a taxable capital gain if the selling price is more than your cost basis.  For personal property not used in business, your cost basis is what you paid (including the warranty), so the buyout will not be taxable income unless you paid less than $9400 for the jeep in the first place.

For property used in business, or partly in business, your cost basis is reduced by depreciation you claimed or could have claimed.  This includes using the car for business (deliveries, rideshare, anything else) where you used the exact expense method or the standard mileage method, because both methods include depreciation.  If the vehicle was used in business, you have to treat it as the sale of a business asset, with the price as your starting basis, minus any adjustments for depreciation, which could result in part or all of the sales proceeds being taxable depending on how much business use there was.