Should you trade in that luxury car?

• Author: Greene, Jeffrey J.
• Position: Brief Article

Since 1986, the annual depreciation on those automobiles that the government deems to be luxury automobiles has been limited. Such limits have lengthened the depreciable lives of most cars, such that a $40,000 auto placed in service in 1995 and used 100% for business would take 20 years to be fully depreciated. Most people will not be willing to hold a car for 20 years and thus will dispose of it well before its depreciable life is over.

If a car is traded for another "luxury automobile," the situation is exacerbated; the like-kind exchange rules of Sec. 1031 are automatically applied to the trade-in and provide that the remaining basis of the old vehicle continues to be depreciated over its remaining useful life. The auto's depreciation schedule would also show an addition in the amount of cash paid for the new automobile subject to the depreciation limits in the year of...