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. 

[User50234]

I am sorry but I am still not fully clear because I didn't sell anything. Allow me to reiterate.

I bought a car new 15 years ago for $36,000. I separately paid $2,000 for the extended warranty (lifetime of a car, unlimited mileage).

Car has not been used for business of any kind - personal use only.

Chrysler officially has a clause in their warranty that they can buy me out if the cost of repairs exceeds the current market price of the vehicle. The buyout consisted of them giving me a check for the cost of the vehicle ($9,400) and I get to keep the car but my warranty is no longer valid.

I hope this makes my situation more clear. The question is - do I report $9,400 on my tax return as a taxable income? Again, I didn't sell the car - it is fully functional and is in my possession. All that transpired is that Chrysler bought me out of the warranty contract because they already paid out much more than I paid for the warranty and they want to cut their losses.

[ThomasM125]

You can deduct the cost of the warranty since that is what they are buying. Your purchased it for $2,000 and they bought it from you for $9,400 so the difference would be your capital gain. You could report it as an investment sale. They may issue you a Form 1099-MISC however. If so you would enter that in as "other income" and then enter an adjustment to back out the income, then enter the sale in the investment income section.

You can make that adjusting entry in TurboTax as follows:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment (invest inc misreported)  and the adjustment as a negative number

You enter investment sales in the Wages and Income section of TurboTax, then Investments Sales, then Stocks, cryptocurrency, Mutual Funds, Bonds, etc... Choose "other" as the type of property sold.