Federal tax credit question: selling used

[daniel]

As I've posted elsewhere, I'm in a bit of a quandary: Nissan is telling me I'll get my Leaf in June. Probably lies, since up to now it's all been promises and lies, but you never know; it could come. Meanwhile, my electric Porsche, that I've been waiting for for two years, is nearly finished, and just waiting for some replacement batteries to clear customs. I don't need two electric cars, but until the Porsche comes and I can drive it for a while, I won't know if it will really meet my needs. Maybe I could find a buyer for it, but considering how much money I've put into it I'd really take a bath on it. If the Leaf arrives before the Porsche is finished, I'll have to make a decision on buying it without knowing if the Porsche will meet my needs, or even if it will work at all.

The Leaf is in high demand now, and I could buy it and then very easily sell it used if the Porsche comes and is as good as it is promised to be. But here's my question:

If I buy the Leaf, and then sell it a month or two later, what happens to the $7,500 federal tax credit? Can I still claim the credit? Or is there a minimum time period I have to keep the Leaf before selling it in order to get the credit. (With the Prius there was a deduction --not a credit-- and if you sold the car within a specified time you lost the tax deduction.) The buyer of a used EV cannot claim the tax credit, and if I cannot claim it if I sell the car too soon, that means I end up paying full price for the car, and either take a $7,500 loss when I sell it, or the buyer pays $7,500 more than folks who buy it new. (Assuming the market is so strong that people will pay as much for a used one as they would have for a new one had they ordered in time.)

Any tax accountants out there who can answer the question? Do you have to keep the Leaf for a specified time in order to claim the federal tax credit?

Thanks.

 

[TomT]

The simple answer is that you forfeit the federal credit. Likewise the state credit (at least in California - elsewhere is no doubt different). It's easier (and cheaper) in the long run to simply pass on taking the car and turn it in to an orphan...

 

[garygid]

However, the correct answer, I believe, is that you would likely be able KEEP (use) the federal tax credit, depending upon your tax situation and intentions for owning and using the EV when you bought it.

However, since it APPEARS that some folks do not even understand the difference between an "estimated delivery" and a "promise" or a "lie", and since the tax situation seems to involve "intention", the tax credit law/rules MIGHT be too difficult for some to understand.

(I am not a tax guy.)

 

[DaveinOlyWA]

actually state credit would still apply. it also applies to all things electric. daniel, i sure hope you are not paying sales tax on those batteries!!

 

[EVDRIVER]

You should be able to take the Federal credit AND the state credit. When you sell the car you will need to send the pro-rated amount of the state credit back but keep the full fed credit, there is no refund clause on the federal credit. That being said, with a very high level of confidence I'm going to bet you spend quite a bit of money and time fixing the pack on the conversion, unless you are a highly skilled EV builder and prepared to tinker I would suggest you get the LEAF. Unless this conversion is done by someone like ACP which they would not do, I'm going to bet you have repeated pack issues. I know that's not what you want to hear but unless you like to tinker or this company doing the conversion and pack has dozens of conversions with over 70K miles on these packs I'm going to bet you will regret it.

 

[DaveinOlyWA]

WA State has no credit per se. they have a sales tax waiver and it does not matter whether the car is new or used. in fact, it does not even have to be a car at all. Batteries purchased for EV use are also tax exempt... at least for now. there is a lot of budget talk that is addressing the exemptions the state currently has and there is a lot of them. hopefully, the EV thing will get passed over being missed in the crowd

 

[EVDRIVER]

WA State has no credit per se. they have a sales tax waiver and it does not matter whether the car is new or used. in fact, it does not even have to be a car at all. Batteries purchased for EV use are also tax exempt... at least for now. there is a lot of budget talk that is addressing the exemptions the state currently has and there is a lot of them. hopefully, the EV thing will get passed over being missed in the crowd

Sorry, in CA. Fed credit still applies.

 

[xtremeflyer]

Here's what I would do in this situation.

I would lease.. Let Nissan take the tax credit. Put $2k down.. If you decide you want it, buy out the lease (ie make a big payment) like others have mentioned.

If you decide you don't want it, throw it up on leasetrader.com .. Put on there that you are looking for someone to take over your payments for $4k (or however much you think you can get) + transfer fees. You net $2k (if someone is willing to pay it), they take over the payments and the federal tax credit isn't an issue because Nissan took that.

You'd have to claim income on the $2k, but you'd have to do that anyway if you sold it for a profit.

~Dave

 

[thankyouOB]

I do not see how various folks are saying you can clearly claim the federal tax credit.

Form 8936 clearly states you cannot claim the credit if your intention is to resell it. that includes actually reselling it.
your intention definitely becomes an issue if you resell it that same year.
you will have to wrestle with that issue.
from your post, that clearly is an intention as you say:
"The Leaf is in high demand now, and I could buy it and then very easily sell it used if the Porsche comes and is as good as it is promised to be."

two of the various rules.
-The original use of the vehicle began with you;
- You acquired the vehicle for use or to lease to
others, and not for resale.

 

[daniel]

Dave: Thanks for the info on the WA sales tax as regards batteries. I will pass this info along to the guy doing the Porsche repair, in case he is not aware of it, though I'm not sure what I'd do if the battery importer insists on charging sales tax. But for the moment, I'm not going to worry about that.

I just got off the phone with the IRS regarding the federal tax credit, and he answered my question:

If within three years of purchase I sell the Leaf to someone who is going to use it in a manner that would disqualify it for the tax credit, then I would have to give the credit back. Some of the conditions that would disqualify the car:

If it will be used outside the U.S. (I presume that means primarily, as opposed to an occasional jaunt across the border, which I couldn't do from here anyway.)

If it will be converted so that it is no longer a battery-powered car. (E.g. someone removes the motor and installs a gas engine.)

If it will be used for lodging, or by a non-profit organization.

I don't remember if there were others, but basically, if I sell it to a private person who will use it in a normal manner in the U.S., then I get to keep the tax credit. If I make a profit when selling it, that's another matter, and if I understood him correctly, I'd have to pay tax on that profit, but he couched it in terms of "reduced basis," so I'm a bit unclear. But the important thing is I'd get to keep the credit, which means I could sell it for what I paid, minus the credit, and break even.

As ThankyouOB points out, I don't get the credit if my intention is to resell the car. But that's not my intention. I specifically stated the case to the IRS man as someone who buys the car intending to keep it, but finds that for some reason it does not suit his needs. That could be because the range is not adequate, or because of a change in the owner's personal situation.

The advisability of selling the Leaf and relying on the Porsche is another matter entirely. I'm aware that that could be problematic. But I'd still have the stinker, and if I did not buy the Leaf I might keep the Xebra, so I'd still have transportation. The guy currently working on the Porsche thinks it will probably need a new pack in a couple of years, and I'd have him install a BMS once he finds one he likes. I am not a tinkerer, but this guy would be available to work on it.

California is not relevant to my persona situation. I live in Washington state.

The best outcome would be if I could drive the Porsche for a while to at least get some enjoyment for my frustration, and then sell it, if I could get a significant part of what I put into it, and keep the Leaf until I can get a Tesla S.

 

[Ualdriver]

I don't remember if there were others, but basically, if I sell it to a private person who will use it in a normal manner in the U.S., then I get to keep the tax credit. If I make a profit when selling it, that's another matter, and if I understood him correctly, I'd have to pay tax on that profit, but he couched it in terms of "reduced basis," so I'm a bit unclear. But the important thing is I'd get to keep the credit, which means I could sell it for what I paid, minus the credit, and break even.

You would owe tax on the capital gain if you sold the Leaf for a profit. Your basis in the car would be reduced by the tax credit, so essentially you could be paying tax on it plus any additional profit.

 

[daniel]

You would owe tax on the capital gain if you sold the Leaf for a profit. Your basis in the car would be reduced by the tax credit, so essentially you could be paying tax on it plus any additional profit.

Not sure what you mean by "... paying tax on it plus any additional profit." I'd pay income tax if I made a profit, not otherwise.

I would not try to get the tax credit twice by selling the car for full MSRP while also getting the credit from the government. My price will be $34,923. After the tax credit the car would cost me $27,423. I would expect that if I end up selling it, the selling price would be close to $27,423 and not $34,923. Of course, if someone wants it badly enough to offer me $35,000 or $50,000 I guess I'd accept the offer and pay the required capital gains tax. But it's silly to think that would happen, and more likely I'd try to get back exactly what it cost me, which is the lower number.

This is all very hypothetical. I wanted to figure out what my options will be. My hope would be that when my Leaf does come I'll be able to make a decision to buy it or not based on whether or not I want to keep it until the Tesla S becomes available to me (not being on the Tesla list). I expect the Leaf to come some time this year, though even that is uncertain, given the way Nissan seems to love jerking us around. (My dashboard says Week of June 6, but we all know how worthless that is!)

 

[Ualdriver]

You would owe tax on the capital gain if you sold the Leaf for a profit. Your basis in the car would be reduced by the tax credit, so essentially you could be paying tax on it plus any additional profit.

Not sure what you mean by "... paying tax on it plus any additional profit." I'd pay income tax if I made a profit, not otherwise.

I would not try to get the tax credit twice by selling the car for full MSRP while also getting the credit from the government. My price will be $34,923. After the tax credit the car would cost me $27,423. I would expect that if I end up selling it, the selling price would be close to $27,423 and not $34,923. Of course, if someone wants it badly enough to offer me $35,000 or $50,000 I guess I'd accept the offer and pay the required capital gains tax. But it's silly to think that would happen, and more likely I'd try to get back exactly what it cost me, which is the lower number.

This is all very hypothetical. I wanted to figure out what my options will be. My hope would be that when my Leaf does come I'll be able to make a decision to buy it or not based on whether or not I want to keep it until the Tesla S becomes available to me (not being on the Tesla list). I expect the Leaf to come some time this year, though even that is uncertain, given the way Nissan seems to love jerking us around. (My dashboard says Week of June 6, but we all know how worthless that is!)

What I should have stated more clearly is that if you sold the car for $34,923 to a buyer, you would have a capital gain because your basis* in the car would be $27,423. You would then essentially be paying tax on your tax credit. If you sold the car for more than $34,923, you would be paying tax on that "additional profit" as well (i.e. the amount over and above $34,923).

Selling the car for above your basis could come into play as shown by the recent sale of a Leaf on eBay:
http://cgi.ebay.com/ebaymotors/ws/eBayISAPI.dll?ViewItem&item=120714665752&viewitem=&sspagename=STRK%3AMEWAX%3AIT

*Off the top of my head, I am not sure how to compute the basis in a newly purchased automobile. I used the numbers you gave me for simplicity.

 

[davewill]

...If I make a profit when selling it, that's another matter, and if I understood him correctly, I'd have to pay tax on that profit, but he couched it in terms of "reduced basis," so I'm a bit unclear. But the important thing is I'd get to keep the credit, which means I could sell it for what I paid, minus the credit, and break even...

The basis is the "cost" you use in calculating whether you made a profit on something. He could mean that you'd have to subtract the tax credit from the price you paid when calculating the profit on the resale...which would make a lot of sense since, in effect, you didn't pay that money for the car, the government did. This would increase the capital gain on the sale.

 

[daniel]

You would owe tax on the capital gain if you sold the Leaf for a profit. Your basis in the car would be reduced by the tax credit, so essentially you could be paying tax on it plus any additional profit.

Not sure what you mean by "... paying tax on it plus any additional profit." I'd pay income tax if I made a profit, not otherwise.

I would not try to get the tax credit twice by selling the car for full MSRP while also getting the credit from the government. My price will be $34,923. After the tax credit the car would cost me $27,423. I would expect that if I end up selling it, the selling price would be close to $27,423 and not $34,923. Of course, if someone wants it badly enough to offer me $35,000 or $50,000 I guess I'd accept the offer and pay the required capital gains tax. But it's silly to think that would happen, and more likely I'd try to get back exactly what it cost me, which is the lower number.

This is all very hypothetical. I wanted to figure out what my options will be. My hope would be that when my Leaf does come I'll be able to make a decision to buy it or not based on whether or not I want to keep it until the Tesla S becomes available to me (not being on the Tesla list). I expect the Leaf to come some time this year, though even that is uncertain, given the way Nissan seems to love jerking us around. (My dashboard says Week of June 6, but we all know how worthless that is!)

What I should have stated more clearly is that if you sold the car for $34,923 to a buyer, you would have a capital gain because your basis* in the car would be $27,423. You would then essentially be paying tax on your tax credit. If you sold the car for more than $34,923, you would be paying tax on that "additional profit" as well (i.e. the amount over and above $34,923).

Selling the car for above your basis could come into play as shown by the recent sale of a Leaf on eBay:
http://cgi.ebay.com/ebaymotors/ws/eBayISAPI.dll?ViewItem&item=120714665752&viewitem=&sspagename=STRK%3AMEWAX%3AIT

*Off the top of my head, I am not sure how to compute the basis in a newly purchased automobile. I used the numbers you gave me for simplicity.

I agree with what you said above.

But since the tax credit is as good as money in my pocket, it makes sense that if I sold the car for $34923 I'd have to pay tax on the tax credit. Another way to think of it is that with the tax credit the car only cost me $27,423, so I'd just be paying tax on the profit. And another way to think of it is that the government is making the cost of the car only be $27,423, so any amount of a sale over that is profit, and should be taxable. Just as if I bought shares of Acme Roadrunner Trap Company for $27,423 and sold them for $34,923.

I won't worry about selling the car above basis. If it happens, it's all gravy. Taxed gravy is not as good as tax-free gravy, but it's still gravy. And since I do not intend to sell the car, I merely wondered what my options would be if I decide after getting it that I don't need another EV.

 

[daniel]

...If I make a profit when selling it, that's another matter, and if I understood him correctly, I'd have to pay tax on that profit, but he couched it in terms of "reduced basis," so I'm a bit unclear. But the important thing is I'd get to keep the credit, which means I could sell it for what I paid, minus the credit, and break even...

The basis is the "cost" you use in calculating whether you made a profit on something. He could mean that you'd have to subtract the tax credit from the price you paid when calculating the profit on the resale...which would make a lot of sense since, in effect, you didn't pay that money for the car, the government did. This would increase your tax liability on the sale.

Agreed. (You posted while I was writing.)

 

[planet4ever]

All this business about buying and selling is nonsense in this particular case. As daniel himself found out from the IRS, he would have to pay full price and would never get the tax credit, nor would anyone else.

xtremeflyer has the only logical solution. No matter what you might think about leasing in general, this one time you should definitely lease. As he points out, you can effectively convert it to a purchase a few months later if you decide to keep the car and don't like the lease. You can also effectively "sell" it without losing the $7,500 credit.

It's a no-brainer.

Ray

 

[daniel]

All this business about buying and selling is nonsense in this particular case. As daniel himself found out from the IRS, he would have to pay full price and would never get the tax credit, nor would anyone else.

Only if you buy it with the intention of selling it. If you buy it, drive it, and find that it does not meet your needs, you can sell it and keep the tax credit. You would pay tax only if you made a profit, and only on the amount of the profit.

 

[planet4ever]

I agree that it is open to interpretation, but it is definitely not a matter of whether you can "keep" the tax credit. If you buy the car sometime this summer, and sell it before the end of the year, you are going to have to convince the IRS next spring that they should give you the credit in the first place, which I expect would be a rather tough sell six months after you got rid of the car.

Ray

 

[daniel]

I agree that it is open to interpretation, but it is definitely not a matter of whether you can "keep" the tax credit. If you buy the car sometime this summer, and sell it before the end of the year, you are going to have to convince the IRS next spring that they should give you the credit in the first place, which I expect would be a rather tough sell six months after you got rid of the car.

Ray

That's not quite how it works. You file your tax return and pay whatever's due or claim whatever's due to you. You don't have to "convince" the IRS of anything unless they decide to audit you. My tax accountant knows the law, and based on what the IRS man told me on the phone, the law is on my side. Note that I do not intend to sell the car. I just wanted to know my options in the event that the Porsche exceeds my expectations of it, assuming it (or the Leaf!) ever get here. I am not optimistic about either.