Luxury Vehicles and Like-Kind Exchanges

Note: The depreciation limits were different for Light Trucks and Vans (Type T) through December 31, 2017. From January 1, 2018 and later, luxury automobiles and light trucks and vans have identical luxury vehicle limits. Property T will remain available to distinguish between the different types of vehicles.

After December 31, 2017, IRS guidelines state that Like-Kind Exchanges are only for real property. Luxury vehicle exchanges should not be entered as a Like-Kind Exchange unless:

(1) the relinquished property was disposed on or before December 31, 2017; or

(2) the replacement property was acquired on or before December 31, 2017.

If you are entering a luxury vehicle that was received in an exchange or involuntary conversion, consider entering it as one asset, rather than two assets. This is a two-step process. Step 1 is disposing of the old asset and Step 2 is entering the vehicle received in the exchange.

1. Dispose of the original vehicle by selecting Dispose on the Asset menu or Dispose an Asset from the Tasks list. Enter the Disposal Date, select Taxable Exchange as the Disposal Method (see note below for an involuntary conversion), and enter the trade-in allowance towards the new vehicle as Non-Cash proceeds.
2. Add a new asset. Use the date of the exchange as the placed-in-service date to ensure that the system correctly applies the luxury vehicle limits. Use the full basis in the newly acquired asset as the Acquisition Value. The basis is the sum of the trade-in amount entered as Non-Cash Proceeds on the disposal plus any additional cash paid for the new vehicle. Leave Purchase selected in the Acquired by section, and there is no need to enter any data in the Beginning Depreciation fields.

The Tax, Internal, and user-defined books default to Yes for all disposal dates and property types under a Taxable Exchange. For financial purposes, you can avoid/defer recognizing the gain/loss on the exchanged asset by going to the Disposal Calculation section of the Disposal dialog, and choosing “No” or “Defer” in the “Recognize?” drop-down for your Internal and/or user-defined book(s).

Involuntary Conversion

If the asset was an involuntary conversion, use the disposal method Involuntary Conversion: Post 1/2/2000 instead of Taxable Exchange. Otherwise, follow Step 1 above.

For Recognize? gain or loss, all of the Tax books default to No, and the Internal and user-defined books all default to Yes for all disposal dates and property types under an Involuntary Conversion. For tax purposes, you can recognize a gain by going to the Disposal Calculation section of the Disposal dialog and choosing “Yes” in the “Recognize?” drop-down for the Tax and other related books. For example, if the rules of IRC Section 1033 are not met (e.g., replacing the converted property after receiving insurance proceeds), a gain would be recognized immediately instead of deferred.