Effect of Trade-In on Tax Basis

If you trade in some business equipment that was used 100 percent for business, in exchange for new business equipment of the same asset category, the transaction will not be a taxable event because it will be treated as a "like-kind exchange."

However, the tax basis of the new equipment will be equivalent to the adjusted basis of the old equipment, plus any additional cash you paid for the new equipment. This tax basis represents the maximum amount you can claim as depreciation for the item, for tax purposes.

If you trade in a vehicle that was used partly for business and acquire another vehicle that will be used in your business, you must use the following computation to determine the depreciable tax basis of the replacement vehicle, assuming that the old vehicle was acquired after June 18, 1984. (If the vehicle was acquired before that date, consult your tax advisor for the proper method to use.) 

The basis for figuring depreciation for the replacement vehicle is:

  1. the adjusted basis of the old vehicle, plus
  2. any additional amount paid for the replacement vehicle, minus
  3. the excess, if any, of the total amount of depreciation that would have been allowable during the years before the trade if 100 percent of the use of the vehicle had been business and investment use, over the total amounts actually allowable as depreciation during those years.


On August 5, 1997, Sally Fox purchased a car for $9,000. On June 1, 2001, she purchased a new car for $21,500. She was allowed a $2,000 trade-in on the old car and financed the remaining $19,500. Assume depreciation claimed on the old car was $7,200, based on 80 percent business use over those years. Assume further that if the car had been used 100 percent for business reasons, the allowable depreciation would have been $9,000. The basis of the new car for depreciation purposes is computed as follows:

Cost of old car
Less: depreciation claimed
Adjusted basis of old car
Plus: additional amount paid
Depreciation assuming 100 percent business use $9,000
Less: depreciation actually allowable 7,200 1,800
Adjusted basis of new car