Taxation of profit from buyback (personal use)

From reading a little bit (I'm not a CPA), looks like any profit from the buyback (greater payment than cost to buy + eligible additional expenses in the eyes of the IRS) would be capital gains. Would like to see what other members' thoughts are on the matter.

I imagine most people would have bought their cars long ago and wouldn't be getting more than they paid for the car + tax + expenses associated with conducting the buyback (mileage rate to/from the dealer as appropriate).

For those that might end up with more buyback money than expenses... here are my thoughts (personal use, driven as a normal car [not parked the whole time] throughout ownership period):

- Most operating expenses (insurance, maintenance, registration) are not valid expenses (against potential profit) if the car was used as a personal vehicle while owned (might be able to pro-rate if it was put into storage at a certain point in time?)
- It's important to own the car for at least 1 year prior to buyback so it's long term capital gains
- It's important to account for expenses properly and record the capital gains on your taxes, even if your long term capital gains rate is 0%

Edit to add:
Interested to know whether the 'buyback' portion is capital gains (as applicable) while the compensation portion is to be entered on a 1099 misc. Maybe someone around here has the answers? Might explain why the 3.0 settlement reads differently.. who knows.

This has been asked and covered here at length.... search is your friend.

To summarize- unless you are a business and have a tdi on your books you will not be on the hook. To the extent a business has a tdi on its books, any recovery over the adjusted book value will create a gain.

Not capital gains, but ordinary income.

I had searched but didn't find much in the first page. I do see some useful threads from deeper in the results. Doesn't seem like the consensus or tax codes agree with your summary. I suppose you didn't read my original post.

Whether those who wish to evade taxes will get audited is another discussion (seems pretty safe but not something I'm interested in).

My take:
2.0 vehicles: Buyback portion profit - capital gains, compensation - 1099 misc
3.0 buyback (as it currently reads) - capital gains

swampyankee said:

To summarize- unless you are a business and have a tdi on your books you will not be on the hook. To the extent a business has a tdi on its books, any recovery over the adjusted book value will create a gain.

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No, that isn't at all an accurate summary of the "consensus" answer (but you're right that it has been discussed quite a bit), nor is it a correct statement of the law. If there's a profit, there's a profit, and whether the car is owned individually or by a business doesn't make a difference. The difference is that a business is more likely to have depreciated the car, and thus more likely to have a profit.

As to the tax treatment of the buyback amount, I'd consider the entire amount to be the purchase price of the car--I don't see a need to treat the restitution portion differently than the vehicle value portion. I think this is consistent with the parties' intent in crafting the settlement, too. I can't find it at the moment, but somewhere in the settlement docs was a statement that it had been deliberately crafted so that most claimants wouldn't get any taxable income. If the restitution payment were treated separately, that wouldn't be the case--everybody would have at least $5k of income out of this.

But since there won't be any 1099s, odds are that most of the tax out of this is going to go unpaid.

It is a non-issue/worry.

DanB36 said:

No, that isn't at all an accurate summary of the "consensus" answer (but you're right that it has been discussed quite a bit), nor is it a correct statement of the law. If there's a profit, there's a profit, and whether the car is owned individually or by a business doesn't make a difference. The difference is that a business is more likely to have depreciated the car, and thus more likely to have a profit.
As to the tax treatment of the buyback amount, I'd consider the entire amount to be the purchase price of the car--I don't see a need to treat the restitution portion differently than the vehicle value portion. I think this is consistent with the parties' intent in crafting the settlement, too. I can't find it at the moment, but somewhere in the settlement docs was a statement that it had been deliberately crafted so that most claimants wouldn't get any taxable income. If the restitution payment were treated separately, that wouldn't be the case--everybody would have at least $5k of income out of this.
But since there won't be any 1099s, odds are that most of the tax out of this is going to go unpaid.

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A business is more likely to depreciate the car vs an individual? Can you tell me how an individual would go about taking deprecation on a vehicle?

What is your definition of profit? Given most of us are commoners (those individuals who don't have the privilege of taking depreciation) can we add in fees like taxes paid on the car? What about maintenance? If I had a major overhaul performed on the car (like transmission) wouldn't this add to my basis? What about interest?

When you factor in these costs, I would stand behind my statement before. Maybe this wasn't a consensus, but it is what I've thought all along.

For example, If I receive a 1099 for consulting work I perform, I will take as a deduction things I normally would not. Internet connection, cell phone, home office, mileage, etc..... This is because these are expenses I incur in order to obtain the income.

Same would go for the TDI. Frankly, I don't think the IRS would go down that rabbit hole.



"Profit" is a nebulous term, at best.

gotta love the conspiracy theorists...

Another thing worth noting is it doesn't matter how VW words the settlement agreement. If the IRS wanted to tax the payments it wouldn't matter what or how VW writes it.

Most will not receive more money than the purchase price anyway.

swampyankee said:

A business is more likely to depreciate the car vs an individual? Can you tell me how an individual would go about taking deprecation on a vehicle?

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An individual wouldn't (at least ordinarily), which is why a business would be more likely to.

What is your definition of profit?

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My definition doesn't matter; the IRS's does, and in particular, it would be their definition of capital gains. See Publication 550 for quite a bit of information on that subject.

You have a capital gain if you sell something, other than an item that you stock in trade, for more than your cost basis in that item. Publication 551 is all about basis and answers those questions, but in short, most of your examples would not increase your basis in the car. As a very rough rule, repairs don't increase basis, but improvements do.

"Profit" is a nebulous term, at best.

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You may think so, but you'll find it pretty carefully defined by the Internal Revenue Code, the tax regulations, and the court decisions under that code and those regs. You'll find the same with respect to capital gains.

gotta love the conspiracy theorists...

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No doubt. Would you care to identify one that's relevant to this discussion (and really, one that's been raised in this thread)? Because I don't see one.

Another thing worth noting is it doesn't matter how VW words the settlement agreement.

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That might be true, but it's not what I said. First, and most obviously (though least relevant), "VW" didn't write the settlement agreement(s)--they were done by committee over the course of several months, with involvement from all the players. But more to the point, you may be right that the precise wording doesn't make much of a difference, but what actually happens does. For example, consider an alternative settlement arrangement: every affected owner gets a check for restitution in the same amount as they'd get under the current settlement. In addition, anyone who wants to can sell back their car for the 9/15 NADA clean trade amount. It would cost VW about the same, so they probably wouldn't care (much), but the restitution payment would almost certainly be a taxable event for everyone. You'd owe taxes on that amount whether you gained, lost, or broke even on the sale.

It's worth noting that nobody here is my client, and I'm not giving legal or tax advice to anybody. If you want that, you should consult an appropriate professional.

DanB36 said:

An individual wouldn't (at least ordinarily), which is why a business would be more likely to.
My definition doesn't matter; the IRS's does, and in particular, it would be their definition of capital gains. See Publication 550 for quite a bit of information on that subject.
You have a capital gain if you sell something, other than an item that you stock in trade, for more than your cost basis in that item. Publication 551 is all about basis and answers those questions, but in short, most of your examples would not increase your basis in the car. As a very rough rule, repairs don't increase basis, but improvements do.
You may think so, but you'll find it pretty carefully defined by the Internal Revenue Code, the tax regulations, and the court decisions under that code and those regs. You'll find the same with respect to capital gains.
No doubt. Would you care to identify one that's relevant to this discussion (and really, one that's been raised in this thread)? Because I don't see one.
That might be true, but it's not what I said. First, and most obviously (though least relevant), "VW" didn't write the settlement agreement(s)--they were done by committee over the course of several months, with involvement from all the players. But more to the point, you may be right that the precise wording doesn't make much of a difference, but what actually happens does. For example, consider an alternative settlement arrangement: every affected owner gets a check for restitution in the same amount as they'd get under the current settlement. In addition, anyone who wants to can sell back their car for the 9/15 NADA clean trade amount. It would cost VW about the same, so they probably wouldn't care (much), but the restitution payment would almost certainly be a taxable event for everyone. You'd owe taxes on that amount whether you gained, lost, or broke even on the sale.
It's worth noting that nobody here is my client, and I'm not giving legal or tax advice to anybody. If you want that, you should consult an appropriate professional.

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I was very clear in my example....... a transmission repair would qualify as increasing the useful life of the asset.

We are talking in most cases where a buyback exceeds the purchase price by a few hundred dollars, IF it does. VW is not going to send a 1099....... if my client doesn't send a 1099 do you think I would report the income? Would most people report the income?

you are full of yourself, but this probably serves you well. I don't buy it

Well, yes, when you pose direct questions to me, it's at least reasonably likely that I'll respond to them. I don't recall ever saying or suggesting that I'd do otherwise.

Now, do you have anything to support your curious interpretation of the tax code? Or are you more interested in throwing rocks from the sidelines?

DanB36 said:

Well, yes, when you pose direct questions to me, it's at least reasonably likely that I'll respond to them. I don't recall ever saying or suggesting that I'd do otherwise.

Now, do you have anything to support your curious interpretation of the tax code? Or are you more interested in throwing rocks from the sidelines?

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There are people who go by the book, and there are people who use common sense. My clients like my common sense.

I imagine you spend a lot of your time defending yourself on internet message boards. It must make you feel very smart

DanB36 said:

Well, yes, when you pose direct questions to me, it's at least reasonably likely that I'll respond to them. I don't recall ever saying or suggesting that I'd do otherwise.

Now, do you have anything to support your curious interpretation of the tax code? Or are you more interested in throwing rocks from the sidelines?

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Is it curious because it doesn't support your paranoid arguments?

Tell me, what is the penalty for not reporting a measly $250 of income for the average taxpayer?

I do very well in my audits.....

swampyankee said:

Is it curious because it doesn't support your paranoid arguments?

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Are you able to discuss the subject without making personal jabs?

A vehicle for business use is depreciated over time. A major repair is deducted as an expense and does not impact the cost basis.

One can deduct a *portion* of a home office space and things like internet and phone can not be deducted unless they are dedicated lines--and I'm not certain on that last point (other than more likely that one can *not* deduct them). One can not deduct things that *could* be used for personal use even if it's 100% business use. My wife wanted to go on a shopping spree to buy some business attire until I explained that unfortunately that doesn't fly with the IRS because she *could* wear them elsewhere even if she never does. I think she can deduct the tailoring costs but that's between her and our CPA at this point.

DanB36 said:

Are you able to discuss the subject without making personal jabs?

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My curious interpretation of your posts leads me to the conclusion that I'm not the only one here making personal jabs, sir.

bizzle said:

A vehicle for business use is depreciated over time. A major repair is deducted as an expense and does not impact the cost basis.

One can deduct a *portion* of a home office space and things like internet and phone can not be deducted unless they are dedicated lines--and I'm not certain on that last point (other than more likely that one can *not* deduct them). One can not deduct things that *could* be used for personal use even if it's 100% business use. My wife wanted to go on a shopping spree to buy some business attire until I explained that unfortunately that doesn't fly with the IRS because she *could* wear them elsewhere even if she never does. I think she can deduct the tailoring costs but that's between her and our CPA at this point.

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There's a formula for the personal vs. business deductions. If I do get a 1099 I take everything I can because the tax on 1099 earnings is so high.

A major repair that extends the useful life of an asset is added to the basis and depreciated. At the end, everything is depreciated anyway.

With the bonus depreciation in effect now and less stringent rules regarding the useful life of assets, most items can be depreciated over the first 5 years. This is on real estate investments.

We lease our cars so the entire payment is a period expense.

swampyankee said:

My curious interpretation of your posts leads me to the conclusion that I'm not the only one here making personal jabs, sir.

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You can be constructive without being condescending.

swampyankee said:

My curious interpretation of your posts leads me to the conclusion that I'm not the only one here making personal jabs, sir.

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I'll take that as a "no."

You've now had two attorneys tell you you're wrong about major repairs (or any repairs, for that matter) affecting cost basis--I even linked to the IRS publication that would have told you that. You seem to be fixated on "will you get caught", which simply isn't the subject of this thread. The subject of the thread is, "what does the law require?" I've given my best understanding of the answer to that question, and why I believe it's the answer to that question. You don't seem in the least inclined to address whether I'm right or wrong (and believe me, I'd love to be wrong), preferring instead to characterize my explanation as a paranoid conspiracy theory (which is, to put it as politely as possible, nonsensical).

If you'd like to explain, and give some authority for, your position that "unless you are a business and have a tdi on your books you will not be on the hook", I'd love to hear it. I mean that seriously--I'd love to not have to pay taxes on tens of thousands of dollars (and I'm far from maxing this out--there are some folks here who are likely to clear six figures out of this settlement). But that's entirely inconsistent with my understanding of the tax code. And though tax isn't my area of practice, I think I'm pretty familiar with most of the relevant subjects.

I will chime in on this. If you sell your VW to VW for more then you paid for it the simple answer is yes that is capital gains and yes you owe taxes on that money. Not sure where 1099 forms came into this but they have nothing to do with it. Even if you sold your vehicle on the private market for more then you had invested into that is capital gains by the tax code and you are supposed to claim this on section D of the 1040 form. This is completely on you to claim it though no forms will be sent to you to claim this but if you were truly audited by the IRS yes you could get in trouble and have to pay the taxes on that income. This is one of those areas kind of like paying taxes on online purchases you are supposed to do that as well in most cases

DanB36 said:

I'll take that as a "no."

You've now had two attorneys tell you you're wrong about major repairs (or any repairs, for that matter) affecting cost basis--I even linked to the IRS publication that would have told you that. You seem to be fixated on "will you get caught", which simply isn't the subject of this thread. The subject of the thread is, "what does the law require?" I've given my best understanding of the answer to that question, and why I believe it's the answer to that question. You don't seem in the least inclined to address whether I'm right or wrong (and believe me, I'd love to be wrong), preferring instead to characterize my explanation as a paranoid conspiracy theory (which is, to put it as politely as possible, nonsensical).

If you'd like to explain, and give some authority for, your position that "unless you are a business and have a tdi on your books you will not be on the hook", I'd love to hear it. I mean that seriously--I'd love to not have to pay taxes on tens of thousands of dollars (and I'm far from maxing this out--there are some folks here who are likely to clear six figures out of this settlement). But that's entirely inconsistent with my understanding of the tax code. And though tax isn't my area of practice, I think I'm pretty familiar with most of the relevant subjects.

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I'm not going to win an argument with an attorney. You win.......

My answers are directed more at somebody who, like me, bought their car years ago. I paid 31K and I'm getting about 27K. In my case I am not on the hook for anything.

If you gain is upwards of $10K (by gain I mean net which is the reimbursement less purchase price) then you will have to decide.

swampyankee said:

A major repair that extends the useful life of an asset is added to the basis and depreciated. At the end, everything is depreciated anyway.

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You seem to be confusing a few things.

When you calculate deductions for real property that you have fixed or repaired, you have to determine whether it was a "repair" or an "improvement." Repairs are deducted in the tax year they're done whereas improvements are depreciated over time.

That's a completely different thing than depreciating an asset like a vehicle for business purposes. Aside from the fact that replacing a broken transmission would clearly fall under a "repair," even if it could be argued that it was somehow an "improvement" no business would ever depreciate a transmission over the lifetime of a vehicle by choice. They'd be writing off $100 per year

Something that would change the cost basis of the car would be putting 18" wheels on it, not replacing the tires. Or in the case of the transmission you decided to upgrade your business fleet with heavy duty transmissions because you were going to use them to tow or haul merchandise. That would change the cost basis but is a totally different scenario from the one that was suggested about repairing a broken transmission.

Article

Taxable or not
In general, “any settlement you get for something other than personal physical injury or sickness is taxable,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting. Most other settlements, such as for back pay and punitive damages, are taxable.
In the case of property, if the settlement merely restores your original value, it’s not taxable, but if it enriches you beyond where you were before, it is taxable, he said.
Theoretically, owners who sold their cars back would not owe tax if the combined payment (trade-in plus cash payment) was less than their basis, which is generally what they paid for the car (or the depreciated basis if they used it in a business). If it was more than their basis, they could owe tax on the excess.
If they kept the car and got it fixed, the cash payment likely would not be taxable if the payment is designed to compensate them for lost value.
If they leased the car, the payment could be taxable because “they had no basis” in the car, according to Luscombe.