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What Tax Concerns Exist When a Dealership Repossesses a Vehicle?

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What Tax Concerns Exist When a Dealership Repossesses a Vehicle?

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Car dealerships want deals to work out so that their customers will come in time and time again for repeat business and provide positive word-of-mouth advertising. Unfortunately, it is beyond the control and power of an auto dealership to ensure or guarantee that every deal works out. In some circumstances, the dealership may need to take steps to repossess the vehicle due to non-payment or other material breaches of the sale or lease agreement. When an auto dealership repossesses a car, truck, van, or another vehicle it must ensure that certain tax obligations are considered and satisfied.

Tax and Other Considerations Involved in a Car or Truck Repossession

When a vehicle is repossessed, dealerships must engage in a series of steps to ensure that tax obligations are fully accounted for. Generally, a dealership that repossesses a vehicle should return the car or truck to inventory at the vehicle’s ACV, determined by the N.A.D.A. blue book or other Department of Transportation approved valuation guide. The dealership should also credit the buyer of the vehicle with a credit against the balance due for the ACV of the car.

In other circumstances, the borrower may be under water on the loan used to purchase the vehicle. That is, consider a scenario where the repossessed vehicle would have an ACV of $2,000. When the default occurs, the outstanding loan on the vehicle is $4,000 leading to a deficiency of $2,000. While collection attempts can increase the amount of the debt, dealerships should ensure that these efforts are compensable under state law.  When multiple repossessions or collection attempts occur, this can lead to an increase in basis. When the deficiency is handled under a deferred payment or installment plan, the gain on any subsequent repossession is equal to the Fair Market Value (FMV) minus the seller’s basis in the instrument obligation and less any repossession costs.