You’re probably semi-familiar approach to trading in cars as a good way to lower your debt over time.
I’m not a big fan of this one.
If you’re not familiar with this idea, let me break it down for you:
It’s basically an approach where you continuously trade in your cars over the years and use the trade-in amount to reduce the debt you owe on the next car.
Let’s say you buy a car for $30,000.
In two years from now, you decide to trade it in and get $15,000 (if you’re lucky). When you trade that car in you’re able to use that $15,000 toward the next car.
So now you owe $15,000 and you do it again several times over the next decade. 10 years later, you’re presumably cycling the money enough times to have a low amount of car debt.
At least that’s the idea.
This car trading approach can definitely work. However, there are some other innovative BollitProof ways that can get you a nice, meaningful deduction instead.
And deductions translate to actual cash in your pocket you can use to pay down your debt even further, if you so desire.
In fact, this BollitProof strategy not only gets you a significant write off, but it can land you a new car as well, by using the Section 179 tax strategy.
Law Change alert!
On January 1, 2018 a new law came to pass called The Tax Cuts and Jobs Act became effective.
Within that is a rule around Tax Deferred Exchanges called a 1031. You might recognize this if you happen to be in real estate because it’s used often in that arena.
The 1031 Tax Deferred Exchange in real estate allows you to avoid paying capital gains taxes when you sell a property so you will be encouraged to reinvest in a new property.
Pretty sweet deal.
So, using the 1031 in the scenario we’re discussing, allows you to add the basis of your previous car, or previous cars as you’re about to see, into your replacement car. This one move creates a loss that you can then deduct this year.
An important side note on the trading in cars method. It’s only applicable through Dec 31, 2017. Anything after that time will not count due to the changes in the 1031 section I mentioned earlier.
Hopefully your accountant told you about that!
Now that we got that out of the way, let me show you how to utilize this method.
Step 1: Look at every vehicle you have traded in before December 31 of this year.
Let’s say, over the course of the last 10 years, you purchased five cars.
Step 2: Add the cost basis of each car together to get your total.
Those five cars had a total cost basis of $100,000.
Step 3: Once you’ve reached that total, subtract the purchase price of your newly purchased car.
You decide you want to buy a Section 179 vehicle in order to get a deduction. (Remember a Section 179 vehicle doesn’t need to be NEW just new to YOU) So, that “new” car costs $40,000. $100,000 – $40,000 = $60,000
Step 4: The difference between the total basis of your cars and your new car price will produce a loss you can utilize immediately.
Deduct the $60,000
Step 5: Then by using Section 179 to purchase a new car, you can also write off 100% of the cost of that new car.
Drive off into the sunset with your new car!
BOOM! You just massively lowered your taxes the BollitProof way!