Business Vehicle Trade-In Tax Treatment: Gain, Basis, Depreciation

The tax treatment of a business vehicle trade-in changed in 2018, and the current rules split what used to be a single swap into two separate transactions. You sell the old vehicle to the dealer for the trade-in allowance and buy the new one at its full price. Any gain on the old vehicle is taxable in the year of the trade, usually as ordinary income, and the new vehicle’s depreciable basis is its full purchase price with no reduction for the trade-in credit.

Why a Trade-In Is Now Two Transactions

Before the Tax Cuts and Jobs Act, Section 1031 let business owners swap one vehicle for another and roll any gain or loss into the replacement’s basis, deferring the tax. The TCJA restricted Section 1031 to real property.¹ Vehicles, equipment, and every other type of personal property lost that eligibility.²

So the IRS sees a sale followed by a purchase. Each side has its own tax consequences, and both hit the same return.

Calculating Gain or Loss on the Old Vehicle

Start with your adjusted basis: the original purchase price minus all depreciation you claimed, or were entitled to claim, over the years you owned it. A truck you bought for $50,000 and depreciated by $40,000 has an adjusted basis of $10,000.

Compare that number to the dealer’s trade-in allowance. If the allowance is higher, the difference is a taxable gain. If it’s lower, you have a deductible loss. A $15,000 allowance against a $10,000 basis is a $5,000 gain. A $7,000 allowance is a $3,000 loss.

Report the result on Form 4797, which handles sales of business property and walks through depreciation recapture.³

If You Used the Standard Mileage Rate

Deducting through the standard mileage rate doesn’t leave your basis untouched. Each year’s rate contains a depreciation component (a set number of cents per business mile), and those cents reduce your basis just as claimed depreciation would. Skipping this step overstates the basis and understates the gain. Publication 463 lists the depreciation-per-mile figure for each year.⁴

Why the Gain Is Usually Ordinary Income

Business vehicles are Section 1245 property. Any gain up to the total depreciation you previously claimed is recaptured as ordinary income, taxed at your regular marginal rate rather than the lower long-term capital gains rate.⁵ Section 179 expensing and bonus depreciation both count toward that recapture total.

Capital gains treatment kicks in only for the portion of gain that exceeds the vehicle’s original purchase price. Vehicles almost always lose market value, so that portion is usually zero. In the $50,000/$40,000/$15,000 example, the $5,000 gain sits entirely inside the $40,000 depreciation window and is fully ordinary income.

The New Vehicle’s Depreciable Basis

Because the trade is a sale plus a purchase, the new vehicle’s depreciable basis is its full price. The trade-in allowance affects the check you write, not the basis you depreciate. A $65,000 truck is depreciated on $65,000 whether the dealer credited you $5,000 or $25,000 for the old one. That’s more favorable than the pre-2018 rules, which forced a carryover of the old low basis.

First-Year Deductions on the Replacement

Three tools shape what you can write off in year one: Section 179 expensing, bonus depreciation, and regular MACRS. How much you actually get depends on the vehicle’s weight.

Section 179

Section 179 lets you deduct the cost of qualifying business property in the year it’s placed in service. For 2026, the overall cap is $2,560,000, with a phase-out starting at $4,090,000 in total qualifying purchases.⁶ A separate sublimit applies to heavy SUVs (below).

Bonus Depreciation at 100%

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁷ It applies to whatever basis remains after Section 179. For a heavy vehicle outside the luxury caps, combining the two can zero out the purchase price in year one.

Luxury Auto Caps for Lighter Vehicles

Passenger vehicles rated at 6,000 pounds gross vehicle weight or less are subject to annual depreciation ceilings that override everything else. For a vehicle placed in service in 2026, the maximum deductions are:⁸

First year with bonus depreciation: $20,300
First year without bonus depreciation: $12,300
Second year: $19,800
Third year: $11,900
Each year after: $7,160 until fully depreciated

The $8,000 gap between the two first-year figures is deduction you can’t recover later if you opt out of bonus depreciation. For a $60,000 vehicle used 100% for business, the caps stretch full depreciation to roughly six or seven years instead of the standard five.⁴

The 6,000-Pound Exception

Trucks, vans, and SUVs rated above 6,000 pounds gross vehicle weight escape the luxury auto caps entirely. SUVs in the 6,000-to-14,000-pound range still face a Section 179 sublimit of $32,000 for 2026, but the remaining basis is eligible for 100% bonus depreciation. A $70,000 heavy SUV placed in service in 2026 could produce a $32,000 Section 179 deduction plus $38,000 in bonus depreciation, writing off the full cost in year one.

Pickup trucks, cargo vans, and other vehicles that don’t meet the IRS definition of an SUV have no Section 179 sublimit at all. Their full cost is eligible for Section 179 up to the overall annual limit.

Business Use Percentage and the 50% Line

If a vehicle serves double duty, you prorate everything by actual business use. Drive 75% for business, and 75% of the purchase price is your depreciable basis, 75% of any trade-in gain or loss is the business portion, and 75% of each year’s depreciation is deductible.

The threshold that matters is 50%. If business use drops to 50% or below in any year, you lose Section 179 and bonus depreciation on that vehicle and are moved onto straight-line depreciation.⁶

Section 280F goes further. If you already claimed accelerated depreciation or Section 179 and business use later drops below the threshold during the five-year recovery period, you recapture the excess (the difference between what you actually deducted and what straight-line would have produced) as ordinary income in the year the use drops.⁹ Trading in that vehicle later then generates its own separate taxable event on top.

Mileage Records Hold Everything Up

Every business-use percentage rests on your logs. The IRS wants contemporaneous records showing the date of each trip, starting and ending mileage, destination, and business purpose.⁴ Contemporaneous means recorded at or near the time of the trip.

Weak records are the most common reason vehicle deductions get disallowed on audit. If the IRS lowers your business-use percentage, it recalculates prior years’ depreciation, triggers recapture, and adds tax and interest. An app that auto-tracks trips is cheap protection.

State Sales Tax on the Trade-In

Federal law changed in 2018, but most states still calculate sales tax on the new vehicle after subtracting the trade-in allowance. On a $65,000 vehicle with a $15,000 allowance, that’s tax on $50,000 instead of $65,000, saving $1,050 at a 7% combined rate. A handful of states, including California, Hawaii, and Virginia, don’t give this credit, and others cap it or restrict it to new vehicles. Check with your state department of revenue.

A 2026 Example

You bought a work truck for $50,000, claimed $40,000 in depreciation, and have $10,000 of adjusted basis. The dealer offers $15,000 for it against a new $65,000 truck rated above 6,000 pounds that will be used 100% for business.

The old truck produces a $5,000 gain ($15,000 minus $10,000), fully ordinary income under Section 1245 recapture, reported on Form 4797.³

The new truck’s depreciable basis is $65,000. Because it’s over 6,000 pounds, the luxury caps don’t apply. You claim a $32,000 Section 179 deduction and 100% bonus depreciation on the remaining $33,000, writing off the full $65,000 in year one.⁷ The $5,000 recapture gain is offset many times over by the $65,000 deduction, but only if the Form 4797 reporting and the underlying mileage records are in order.

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
2
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
3
Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
4
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
5
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
6
Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Internal Revenue Service. Rev. Proc. 2026-15
9
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles