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Reporting income on the SUV sold to nephew

Jim HamillQ: I have a 2010 Nissan SUV that is in great operating condition and has a good body. My nephew in Denver needs a car for a new job that he will be starting. He will have to drive across the Denver metro area and his “college car” is on its last legs and is getting too expensive to repair and too unreliable for the needs he now has. I am selling my Nissan to my nephew for the trade-in value that we found on the internet for a car in “average” condition. This price is probably a bit lower than I could get from someone else but I also avoid any hassles of a private sale. My real question is how I report income from this sale. My nephew will pay me over 36 months.

A: You should have no income to report from this sale. From what I can tell the SUV has been a personal use vehicle of yours. I would certainly expect that you are selling for much less than what you purchased the vehicle for.

Unless you have had business use of the vehicle, so that you claimed depreciation deductions to reduce the tax cost, your sale will create a loss. This loss arose from personal use of the vehicle during which time it declined in value.

Personal-use assets sold at a loss do not allow you to claim the loss on your tax return. But there is also no income to report from the sale when there is no gain realized from the sale.

Again, I am assuming that you never claimed tax deductions for depreciation of this vehicle. That would include the “Section 179 expense” amount.

Any depreciation or expense amounts would reduce the tax basis and you would need to determine whether there could be a gain from the sale. This is not typical for a vehicle.

Since you are receiving payments over time, you will need to report interest income on the deferred payment contract. The tax law requires that you charge a minimum interest rate. If you fail to do that the law “imputes” the minimum rate.

I don’t know how frequently your nephew will make payments, but the number of payments doesn’t change the required rate very much for a short-term note. If you charge 2.15% you will not be required to impute interest. If you impute it will be at the minimum required rate.

A final point — you may have a small gift based on the price you are charging. You may make $15,000 annual gifts to your nephew without reporting to the IRS. Any gift here is small and should fall within this no-reporting limit.

Q: I purchased a house with zero down and seller financing. We are having a private closing that a lawyer is handling and I have three tenants that will begin occupancy in mid-August when UNM starts up again. This is an investment property and I want to depreciate it to offset the rental income. My question is whether I can use the full purchase price for the depreciation cost if I buy property with zero down payment.

A: Your tax basis, used to depreciate the investment property, includes the full purchase cost. This is so even if some of the consideration, and in this case all of the consideration, was financed.

The only tax issue that sometimes arises is whether the note to the seller is bona fide debt. This is most likely to arise if the note holder is a related party. You have given no indication that there is not a legitimate borrower-lender relationship established.

You cannot depreciate land so you will need to allocate some of the purchase price to land. The same allocation would be required for personal property, such as a refrigerator, that was part of the purchase. The difference — you could expense the refrigerator cost.

You have no concerns if you are the “real” owner for tax purposes. Be sure to have a written note that calls for regular payments of principal and interest. I assume that you are responsible for property taxes and hazard insurance. If so I would not be concerned about your ownership status.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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