Beginning January 1, 2018, tax reform no longer allows Section 1031 exchanges on personal property such as your business vehicle.
The trade-in was the most common 1031 exchange of a business vehicle. Now, because of tax reform, the vehicle trade-in is simply the sale of the old vehicle to the dealer and the purchase of a new vehicle. The sale to the dealer creates gain or loss on the sale just as it would on an outright sale.
But having a taxable event does not necessarily mean that you are going to pay more taxes. There’s more than one nifty silver lining for many business taxpayers in this lost ability.
For example, if you pay self-employment taxes, you usually come out ahead if you use the “sell and buy” strategy rather than the trade-in strategy (Section 1031 exchange).
With the sell-and-buy strategy, you save self-employment taxes because
- you don’t pay self-employment taxes on the sale of your existing business vehicle, and
- you deduct depreciation and Section 179 expensing on your new vehicle (even when you use IRS mileage rates, you benefit).
Owners of S and C corporations don’t generate any self-employment tax savings on the sales and purchases of new vehicles. They just have gains and losses.
If you operate as a corporation and the sale or trade-in of your existing vehicle is going to produce a big taxable gain, why do it? Before tax reform, when you could avoid taxes with the trade-in, you could easily justify the newer vehicle. Not so after tax reform.
Perhaps now, more than ever, you should have me calculate your tax result before you sell or trade in a vehicle or other personal property.