When may a Texas motor vehicle dealer or leasing business deduct the fair market value of a replaced vehicle?

Plain-English summary

The Texas Comptroller listed four conditions for a business claiming the fair market value of a replaced vehicle as a deduction from the consideration paid for a substitute vehicle under § 152.002(c). The claimant had to:

1. Be in the business of selling, renting, or leasing motor vehicles.
2. Obtain Texas certificates of title to both vehicles.
3. Obtain both vehicles for personal or business use.
4. Offer the replaced vehicle for sale before claiming the deduction.

The requesting company could not claim a retired vehicle titled to a different company; the retired vehicle had to be titled in Texas to the claimant.

The letter separately explained the ordinary trade-in exclusion under § 152.002(b)(5). That provision removes from taxable consideration the value of a vehicle a seller takes in exchange for another vehicle, but the trade-in must actually be delivered to the seller.

What this means for you

Vehicle dealers and leasing companies

Title ownership was essential to the replaced-vehicle deduction. A related company's title was not enough, even where the replacement vehicle would be titled, registered, and leased by the claimant.

Fleet accountants and tax professionals

Do not confuse the business fair-market-value deduction with a customer trade-in. The ruling described different statutory conditions for each.

Common questions

Q: Could the claimant deduct a retired vehicle titled to another company?

A: No. The letter required Texas title to the retired vehicle in the claimant's name.

Q: Was the deduction available to any vehicle owner?

A: No. The letter limited it to a person in the business of making motor vehicle sales, rentals, and leases.

Q: What did the separate trade-in rule require?

A: The trade-in had to be actually provided to the seller as consideration for the other vehicle.

Citations and references

• Tex. Tax Code § 152.002(c)
• Tex. Tax Code § 152.002(b)(5)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9004L1018B01

Original ruling text

April 19, 1990

Dear ****:

Thank you for your recent letter requesting clarification on the
fair market value deduction for motor vehicles.

If a person wishes to deduct the fair market value of a replaced
vehicle from the total consideration paid for a substitute vehicle
under Section 152.002(C) of the Texas Tax Code, the person must:

1. Be engaged in the business of making sales, rentals, and
   leases of motor vehicles.
2. Obtain a Texas certificate of title to both vehicles.
3. Obtain both vehicles for personal or business use.
4. Offer the vehicle being replaced for sale before claiming
   it as a fair market value deduction.

Your specific questions are restated below (in part) with my
response following.

1. A new vehicle (replacement will be titled, registered and
   leased in the name of *. The replaced vehicle is
   titled in the name of a company other than *. Can
   **** declare fair market value on the replaced vehicle
   against the replacement vehicle? Why?

RESPONSE: No, the retired vehicle must be titled in Texas to
**** as provided in Section 152.002 of the code.

2. A new vehicle (not for lease) is titled and registered in
   a company name (not ****) and the "traded-in" vehicle,
   also not for lease, is titled and registered in the same
   company's name. Can the net tax difference or fair market
   value be given? What criteria should be met by both dealer
   and owner?

RESPONSE: A fair market value deduction is provided only
for a person engaged in the business of making sales,
rentals and leases of motor vehicles. In the situation
given here you may be referring to Section 152.002(b) (5)
of the Texas Tax Code which provides that total consideration,
the amount on which tax is based, does not include
"the value of a motor vehicle taken by a seller as all or
part of the consideration for sale of another motor vehicle.
"The trade-in must actually be provided to the seller.

This opinion is based on the facts presented. If there are
additional or different facts, the opinion may change.

If you have any questions or need additional information, you may
call me toll free at 1-800-252-5555, extension 5-0330. The
regular number is 512/463-4600, or write me at Tax Correspondence,
Comptroller of Public Accounts.

Sincerely,

Bettie U. Peterson
Tax Correspondence Division