2021 Vehicle Purchase Deductions for Landlords
Do you need a new business vehicle? Perhaps one that you can lug rehab materials around in or drive to your rentals?
And do you need tax deductions this year?
Real estate investors who are running a trade or business (most landlords are) can claim a deduction for purchasing a new or used vehicle.
And if you’re smart about what type of vehicle you buy, the deduction can be 100% of the purchase price.
Ground Rules
These easy-to-remember rules will help to ensure your tax deduction is respected and you don’t end up on the bad side of an audit.
The vehicle must:
- Be more than 6,000 pounds gross vehicle weight (a “heavy” vehicle)
- Be an SUV, crossover, van, truck, cargo van, or passenger van
- Be purchased in 2021
- Be placed-in-service in 2021 (driven for business use)
Thanks to the 2017 Tax Cuts and Jobs Act, the vehicle can be new or used and still qualify for 100% bonus depreciation (IRC Sec. 168(k)(2)(A)(ii)). The requirement for bonus depreciation is that the vehicle is new to you and acquired in an arms-length transaction.
Is an SUV a heavy vehicle? In PLR 9520034 the IRS confirmed that if the gross vehicle weight is more than 6,000 pounds, the vehicle is not a passenger vehicle for tax purposes and qualifies as “heavy” like a truck or van.
Purchased In the Business Name (When Using Corporations)
In order for you to claim bonus depreciation or Sec. 179 on a vehicle purchase, the vehicle must be purchased in the business name.
The purchase cannot be made in your personal name and then later transferred into the business name when using corporations.
If you are a sole proprietor or operating an LLC, you can purchase in your personal name.
Personal Use Issues
If there is any personal use of the vehicle, you will only be able to deduct the business-use portion of the vehicle. This means if you buy a $100,000 vehicle that you personally use 20% of the time, you will only be able to deduct $80,000 of the purchase price.
You must track all miles traveled in the vehicle during the tax year to determine the personal use percentage. If you track 10,000 miles but only 8,000 are for business, that’s where you find the 20% personal use ratio described above.
What if You Don’t Want to Use Bonus Depreciation?
If you decide to elect out of bonus depreciation, you have other options to write-off the purchase price:
- SUVs and crossovers -> use Sec. 179 to deduct up to $25,000 of the purchase price
- Trucks and vans -> use Sec. 179 to deduct the entire purchase price up to $1,050,000
- Use regaulr MACRS depreciation to deduct the cost over five years
What Happens When You Sell the Vehicle?
When you sell property, your gain is calculated by taking the selling price less the adjusted basis of the property being sold.
When you use bonus depreciation to write off the full cost of the vehicle in the year of purchase, your adjusted basis in the asset is reduced to $0.
So if you sold a used truck for $20,000 that you had previously 100% bonus depreciated, because your basis in the truck is $0 (thanks to the bonus depreciation), your gain is $20,000 ($20,000 – $0).
Typically though, a taxpayer would replace the business vehicle being sold with a new vehicle.
In such a case, if you buy a $50,000 truck and bonus depreciate it, you’ll end up with a $30,000 tax loss: ($20,000 gain from old truck – $50,000 bonus depreciation from new truck).
What if your vehicle is less than 6,000 pounds?
Part of the ground rules was making sure the vehicle weighed more than 6,000 pounds… but what happens if it doesn’t?
If a vehicle is used at least 50% for business and weighs less than 6,000 pounds bonus depreciation and Sec. 179 expensing will be limited to $11,160 for the year in the aggregate.
As you can see, it’s not nearly as powerful to purchase a non-heavy vehicle for your business.
Takeaways
Re-read the ground rules and make sure you cement the 6,000 pounds number in your mind. That’s one key to obtaining a large write-off at the end of the year.
Make sure the vehicle is purchased in the business’s name, it’s placed in service before the end of the year, and your personal use is limited.
And remember that when you sell the vehicle, your adjusted basis is going to be low due to all the early deductions you took. That means you’ll have a large gain on sale… but you can offset that gain by purchasing a new vehicle and repeating the cycle.
See you in a new Tesla Model X (6,788 to 6,878 lbs).
